Stocks, bonds, and gold are on the move as Trump’s Republican party loses the Senate and the House.
Key Takeaways
- AI-linked tech stocks came under pressure as investors weigh reduced investment and greater regulatory scrutiny, particularly around data centers.
- US Treasuries climbed, sending yields lower, as a more divided government looked set to hamper fiscal stimulus.
- The US dollar fell amid concerns that the prospect of tighter regulation on AI could hamper US economic growth.
The Democratic Party has stormed to victory in the US midterm elections, taking control of the Senate and the House of Representatives in a sharp rebuke to President Donald Trump that will reshape the balance of power in Washington and ripple through financial markets.
The electoral rout, widely seen as a referendum on the president, ushers in a new era of divided government and greater restraint on the administration, analysts say.
Stock futures turned positive early Wednesday, reversing earlier losses as the votes rolled in, with futures tied to the S&P 500 and the tech-heavy Nasdaq both up around 1%. US Treasuries rallied and yields softened, while US dollar weakness against major currencies supported commodities like gold. But oil prices and defense stocks weakened amid expectation of greater scrutiny of the Iran war.
AI-linked stocks suffered a blow amid fears over a pullback in investment. Shares of Elon Musk’s Tesla TSLA and SpaceX SPCX both fell 3%, while neocloud companies CoreWeave CRWV and Nebius NBIS, and cloud computing stock Iren IREN were down around 1%. Intel INTC and Oracle ORCL shares were also seen lower.
Goldman Sachs analysts say the political shift is likely to have “significant implications” for the AI buildout, with several Democratic Party winners having explicitly campaigned on stricter data center regulation.
“We expect Democratic governors in Texas, Georgia, and Michigan to impose conditional moratoria pending new legislation restricting data centers. That legislation could end certain tax breaks, tighten environmental, water, and electricity rules, and make it easier for localities to impose their own moratoria,” they note, adding that states in which Democrats look likely to introduce restrictions account for 45% of planned US data center capacity ....
Kit Rees, investment strategist at Quilter, says the Democrat sweep suggests that the sector could “feel the heat” from greater regulatory scrutiny, particularly around data centers—an especially hot-button topic in the run up to the elections. That, in turn, could hamper wider and increasingly interlinked US equity market returns. “AI has been an enormous engine powering the US economy, so any curbs on its future development could threaten to put the brakes on growth,” Rees says.
Equity markets were already under pressure ahead of the elections amid growing jitters around AI spending and elevated oil prices. Big Tech names, including Nvidia NVDA, Microsoft MSFT and Amazon AMZN, nevertheless rose along healthcare and renewable energy stocks, following the early results. Defense stocks, meanwhile, pulled back.
AI Stocks Under Pressure, Bonds Rally, and Gold Price Rises
UBS analysts argue that the greater congressional oversight will “not necessarily derail the AI investment cycle,” with broad federal restrictions still subject to legislative and federal constraints. The composition of state governments, including the result in Texas—where James Talarico flipped the state to Democrat—“may prove more consequential for individual data center projects than the change in congressional control,” they add. However, Berenberg chief economist Holger Schmieding warned that a slowdown in AI investment, alongside the drag from Trump’s clampdown on immigration, could dampen US GDP growth toward a pace of around 1.5% in 2028, from a current rate of 3.4% in the third quarter of 2026.
The dollar fell amid concerns that the prospect of tighter regulation on AI could hamper the growth outlook. The US dollar index, which tracks the greenback against a basket of six currencies, slid 0.5% to its lowest point in over a month to 101.32.
US Treasuries rallied, sending yields lower, with the rate on the benchmark 10-year government bond declining to 4.92%. Jim Reid, global head of macro research at Deutsche Bank says that a “divided government has generally made it harder for fiscal stimulus to be passed,” so a Democrat sweep has slightly eased concerns on the country’s fiscal trajectory. Reid also says that investors also now pricing in around 50 basis points of rate rises from the Federal Reserve until 2027, below the pre-election level.
Still, Goldman argues that the Democrats could be expected to reverse spending cuts enacted in last year’s fiscal package, which would, in turn, boost spending by an estimated 0.25% of GDP in 2027. “The first test will come Dec. 11, when spending authority is set to expire. Given continued disagreement on spending levels and other policy disputes, a short-term extension to February or March looks most likely,” the analysts say.
The fall in yields and the dollar boosted gold prices, as a weaker greenback makes the precious metal cheaper and more attractive for overseas buyers. Gold futures jumped 2.9% to $4,055.40 an ounce, while the spot price soared 3% to $4,047.57. Higher gold prices drove up shares in FTSE 100-listed precious metal miners, with Fresnillo FRES and Endeavour Mining EDV both gaining around 4%.
International Stock Market Winners and Losers: Defense Stocks Slide
The midterm elections also raise questions about the course ahead for the US’s international agenda, including its ongoing war with Iran, and its support for other foreign policy priorities such as Russia’s war with Ukraine. While analysts foresee a new period of increased volatility in policymaking and potential legislative gridlock, they also note that Trump could be expected to lean heavily on his presidential veto.
Across the Atlantic, defense stocks were among the biggest fallers on the UK’s blue-chip index as investors assessed what a Democrat midterm victory could mean for government defense spending plans. London-listed BAE Systems BA shares declined 5.3% and Babcock International BAB fell 3%. Major defense companies across wider Europe also fell, with Germany’s Rheinmetall RHM down over 2% and France’s Thales HO around 3% in the red, while Italy’s Leonardo LDO dipped nearly 2%.
“The fears around the impact on European defense stocks are fair, but we still see huge value in the sector, and believe the structural drivers of increased global conflict and the requirement to restock by euro nations are still being under-appreciated by the market,” says Morningstar’s Field.
The broad STOXX Europe 600 index rose 0.9% on Wednesday morning. Danish wind farm developer Ørsted ORSTED was among the biggest gainers, with shares up nearly 7%. Other clean energy stocks also climbed on Wednesday morning, with Denmark’s Vestas VWS up nearly 4% and German-listed firm Nordex NDX1 adding 5.5%.
As the midterm results buoyed clean energy shares, oil prices dropped, with Brent crude futures slumping 1.4% to $102.17 a barrel. Ipek Ozkardeskaya, senior analyst at Swissquote says, that while developments in the Middle East will outweigh US political headlines in the short run, a Democratic sweep would increase scrutiny of the administration’s handling of the Iran war.
“The new Congress could use its influence over spending to challenge additional military funding and increase pressure for a diplomatic solution once it takes office in January,” she says, adding that if the result is “followed by credible negotiations and prospects of safer shipping through the Strait of Hormuz, oil prices could fall sustainably.”
At the same time, the executive branch retains broad authority on foreign policy and tariffs. As such, a tougher US stance on Iran is a “real risk,” with implications for oil prices and inflation, according to Andrew Jackson, head of investments at Vontobel.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.