Markets After Midterms

Estimated reading time: 6 minutes

New and Blue Congress

As we write this, markets are open and letting out what appears to be a very large sigh of relief. Some of it is probably just relief that midterms are over, which is usually the case after any Election Day.

But it also looks like markets are broadly happy that Congress will be controlled by the Democratic party. (Key word being “broadly” — but I’ll get to the caveats later.) 

Here is an easy before-and-after visual of how control of the House and Senate is expected to change, along with the results of the governor races:

It’s worth noting that prediction markets and polls gave the Democrats a high probability of winning in the midterms, but no one expected them to win by such a wide margin. 

Markets took some time to digest the surprise. Even in the overnight session and pre-market trading, the S&P 500 futures market saw a major reversal from negative to positive.

There are various reasons this could’ve happened, and they’re mainly speculation, but here’s what we know: The initial negative reaction did not hold. This could be a simple case of investor emotion driving the bus in the immediate aftermath – buy the rumor, sell the news? That’s likely to level out as days go on and we return to market and economic fundamentals.

Reading the election results along with recent consumer sentiment, you have to conclude that Americans have been broadly unhappy. In most, if not all, cases where there is widespread dissatisfaction, voters change who has control in Congress. This time is no exception. 

Who Didn’t Celebrate the Result

Despite the overwhelming number of green squares on market screens, there were some red spots — mainly in Energy, Capital Goods, and Semiconductors. 

For Energy, I’m painting with a relatively broad brush and must point out that clean energy stocks are responding positively. But Energy stocks that have exposure to the crude oil markets and ongoing war in Iran are down on the election news. The most plausible fundamental conclusion to draw – if there even is one – is that a Democratic Congress may be more likely to pressure the White House to de-escalate the war and/or strike some sort of deal with Iran. 

Semiconductors and Capital Goods are a different story, although in some ways, they’re still driven by the availability of energy. The governor races are what matter here, and a Democratic governor being elected in Texas is particularly important. 

According to BloombergNEF, a large proportion of future data center capacity was expected to come from Texas, followed by Georgia, Virginia, and Ohio. Of those top four states, three of them flipped their governor from Republican to Democrat. 

Why does that matter? Because governors can influence data center construction. Democrats are seen as less friendly to data center buildouts, and fewer data centers mean less demand for electricity and compute. All else being equal, that leads to less revenue for the companies benefitting most from the AI buildout. 

Markets For the Rest of the Year

Let’s not overcomplicate this: Voters were unhappy, so they voted for a change of control. Markets were uncertain before the election, they’re more certain now. They’re poised for a relief rally, which is pretty typical. 

That being said, it’s clear that it may not be a rising tide lifting all boats and investors will still have to be choosy about their investments, particularly those related to the AI theme. There have been some major nerves in Technology stocks lately, and it appears that isn’t over in certain pockets. But the market on the whole is celebrating – for now – and that’s a relief for many. 

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