Last week's midterms delivered a surprising result. Democrats won control of both chambers of Congress, flipping more than 40 House seats, with a potential gain of up to 48, and adding seven Senate seats, a number that could rise to nine if they win Alaska and Mississippi, both still too close to call on Friday. This resounding win, however, remains short of a two-thirds majority that could override presidential vetoes.
Such a swing is notable, signifying what we see as a repudiation of the president and his most controversial policies, with the Iran war and tariffs among the most obvious given their impacts on the cost of living. Yet midterm losses for the party in power are not uncommon. Clinton lost 54 House seats and eight Senate seats in 1994, Obama lost 63 and six in 2010, and Bush lost 30 and six in 2006.
With Republicans remaining in the White House and now facing a Congress controlled by Democrats, a key question for investors is what the new Congress can change, and where the president's authority will limit its reach.
What Congress Can Actually Do
The president retains considerable authority over tariffs and foreign policy, so practical constraints matter more than headlines. Overriding a veto requires Republican senators to break ranks. A minority party under siege tends to hold together, and the president retains core support within his own party.
On Iran, Congress is likely to bring funding questions and investigations rather than a change of course. We are not optimistic about a quick resolution since both sides (the U.S. and Iran) appear to overestimate their leverage. However, the clear message from voters on affordability may give the administration some pause in resuming military activities. An agreement to reopen the Strait of Hormuz should bring oil prices down, helping bring inflation down and thus helping consumers.
We’re also not particularly optimistic about any near-term reductions on tariffs. We believe the president remains adamant about their importance, and the revenues coming in from those tariffs will be needed in fiscal 2027 and beyond. Recall that tariffs put in place by the Trump administration in its first term largely remained in place during the Biden administration.
Looking ahead, Democrats are expected to emphasize affordability, particularly for health care and housing. The debt ceiling, projected (under our own analysis) to be breached potentially in early February 2027, could give them leverage in negotiations.
Build It Right or Not at All?
The most notable outcome from the midterms, in our view, relates to the AI infrastructure buildout. Voters showed their discomfort through ballot initiatives and governors' races, although pressure on the AI investment boom was already building before the election, and concerns about data centers are increasingly bipartisan.
That backdrop matters because the election gave those concerns a political vehicle. In Texas, for example, Democrat Gina Hinojosa defeated Governor Greg Abbott after campaigning for a moratorium on new data centers until the state adopts rules on power, water and environmental impact. A call to build data centers “right” can, in practice, mean significant delays.
It is this threat that likely contributed to the sharp sell-off of AI-related stocks last week, dragging the S&P 500 Index down by about 4% on Thursday before it regained a bit of ground on Friday.
Power availability already constrains the AI buildout. Additional legal and financial restrictions would likely weigh on the AI “enablers” in technology, industrials and utilities: Democrats may review, and potentially rescind, the 100% expensing of data centers to slow growth, while states could add taxes or other local costs even without coordinated federal action. Some view the effect as manageable because data centers bring in tax revenue and many projects will still proceed, only more slowly. Our concern is that investors need to distinguish projects where ground has already been broken from those in an earlier stage of development in “blue” or “purple” states.
A slower buildout is not necessarily all negative, however. It brings AI investment closer to a more manageable pace that both supply and demand can support, as we noted in our piece, “AI: Boom? Bust? Or Both?” It also supports our view that the market opportunity is transitioning from AI enablers to adopters, a topic we discussed in our recently published Solving for 2027 outlook.
Ultimately, index performance this year has leaned on a handful of semiconductor and AI buildout stocks, and a slower pace will put pressure on those stocks and reduce that dependence. Names most tied to the AI buildout are seeing continued pressure in credit markets as well.
Positioning for a Broader Market
If less capital flows to the AI buildout companies, continued market leadership will need to come from elsewhere. Rather than continued momentum-chasing in narrow segments such as semiconductors, we expect rotation toward adopters to accelerate.
We remain focused on other key risks: higher interest rates, questions about the return on AI investment and the longevity of the Middle East conflict (keeping energy prices high). The recent weakness in markets and AI-related stocks may nonetheless give investors with cash an opportunity to add to equities and credit.
As recent economic data (GDP growth of 3.4% in Q3 and a strong labor market report on Friday) has demonstrated, the U.S. economy remains healthy. A slower AI buildout and less dependence on a handful of technology stocks should support broader leadership in the equity markets, particularly companies embracing productivity-enhancing technology tools. In our view, this represents one of the market's most attractive opportunities.
What to Watch For
Tuesday 11/10:
- U.S.: Core Consumer Price Index
- China: Trade Balance (USD)
Wednesday 11/11:
- Germany: Consumer Price Index
Thursday 11/12:
- U.S.: Existing Home Sales
- U.K.: GDP
Friday 11/13:
- U.S.: Producer Price Index
- Eurozone: GDP
