U.S. midterm elections yielded a leadership shift in Congress, as the Democrats took control of both the House of Representatives and the Senate. As of this morning, Democrats flipped 27 seats in the House, and are on track to pick up 40-45 seats, while they added seven Senate seats with Alaska and Mississippi still too close to call. The wave spread to the governors’ mansions as well, as Texas, Ohio, and Georgia elected Democrats. In fact, Democrats now sit in the governor seat of all seven of the 2024 Presidential swing states. Initial analysis indicates that voter turnout was skewed towards younger and female voters; in addition, the Latino vote, which had been so pivotal for the Republicans in 2024, shifted to the Democrats as well along with Independents.
Looking ahead, the short-term implications of yesterday’s events are a potential push by President Donald Trump for the lame duck session of Congress to preemptively address the debt ceiling (projected to be breached in February 2027) and to increase defense spending. There is also some discussion of a Supreme Court nomination to replace either Justice Samuel Alito or Justice Clarence Thomas, neither of whom have announced retirement plans. However, given the strength of the Democratic push and the number of Republican House members who lost their seats, rallying support for those initiatives in the shortened holiday window may prove challenging. Permitting reform, however, does have bipartisan support, and the probability of its passage over the next several weeks is higher than these other initiatives.
Attention will then shift to the likely legislative actions for the newly empowered Congress in January. With a clear message sent by voters on the state of the U.S. economy, Democrats are likely to renew pressure to boost healthcare spending, restoring ACA subsidies and Medicaid cuts and pushing for better pricing on a significantly larger number of pharmaceutical drugs. In addition, the 10% limit on credit card interest will be a renewed area of focus, as will tariffs with direct impact on non-discretionary consumer prices such as food. Food stamp cuts will likely be reversed, and a more explicit plan to ease the strain of housing affordability will too be contemplated. There is also the potential for Congress to push for a resolution of the conflict in Iran, given that additional funding will need to be approved. Assuming that the debt ceiling cannot be raised in the lame duck session, Democrats may have some leverage on passage of these proposals as we move closer to the second quarter of 2027 – but with the pace of Congressional investigations likely to accelerate, compromises may be tough to come by, and President Trump will be willing to exercise his veto power.
The most notable change expected is the treatment of data centers. Voters indicated their discomfort with them through both ballot questions and the gubernatorial results; Democrats are likely to pursue a review of 100% expensing of data centers as a means to slow their growth. Taxes or other local financial considerations are also likely to come into play; even if not at the federal level, increased costs will only compound the recent inflationary impulse for data center resources. The need for power has already been identified as a governor on the build out, and restrictions – either legal or financial – on the growth of data centers in the U.S. will likely weigh on AI enablers.
Equity and bond market reactions have been positive. The confluence of a lifting of election uncertainty and the downward pressure already experienced in data centers and AI at large over the past several weeks is translating to a relief rally, but the underlying challenges – higher interest rates, indeterminate return on capital for AI, continued Middle East tensions – remain. As such, we are not making meaningful changes to our allocations but acknowledge that with the recent weakness in the AI trade, there may be opportunities to allocate to both equities and credit for investors with cash.
