US Midterms: How Markets Are Reacting to Democrats’ Congressional Gains

Key Takeaways

• AI-linked tech stocks came under pressure as investors weighed reduced investment and greater regulatory scrutiny, particularly around data centers.
• US Treasuries climbed, sending yields lower, as a more divided government looks set to hamper fiscal stimulus.
• The US dollar fell amid concerns that tighter AI regulation 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 of President Donald Trump. This will reshape Washington’s balance of power and ripple through financial markets. Analysts say 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.

Stocks were positive in midday trading on Wednesday, reversing earlier losses as votes rolled in, with the Morningstar US Market Index up 1.7%. The S&P 500 was up 1.8% while the tech-heavy Nasdaq added 2.0%. 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 expectations of greater scrutiny of the Iran war.

AI-linked stocks suffered amid fears of a pullback in investment. Shares of Republican Party-backer Elon Musk’s Tesla TSLA were down 2.0% in midday trading, and SpaceX SPCX fell over 2.7%. Neocloud stocks CoreWeave CRWV and Iren IREN were more than 9.0% lower, while peer Nebius NBIS fell 5.8%. Nvidia NVDA and Intel INTC also fell.

Goldman Sachs analysts say the political shift will likely have “significant implications” for the AI buildout, with several winning Democrats 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 Democratic sweep suggests 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 could in turn 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. Some Big Tech names, including Microsoft MSFT and Amazon AMZN, nevertheless rose along with healthcare and renewable energy stocks following the early results. Meanwhile, defense stocks pulled back.

AI Stocks Under Pressure, Bonds Rally, and Gold Price Rises

UBS analysts argue that greater congressional oversight will “not necessarily derail the AI investment cycle,” since broad federal restrictions are still subject to legislative and federal constraints. The composition of state governments, including in Texas—which now has a Democratic governor and senator—“may prove more consequential for individual data center projects than the change in congressional control,” they say.

However, Berenberg chief economist Holger Schmieding warns that a slowdown in AI investment, alongside the drag from Trump’s clampdown on immigration, could dampen US GDP growth to around 1.5% in 2028, down from 3.4% in the third quarter of 2026.

The dollar fell amid concerns that tighter AI regulation could hamper the growth outlook. The US Dollar Index, which tracks the greenback against a basket of six currencies, slid 0.5% to 101.32, its lowest point in over a month.

US Treasuries rallied, sending yields lower, while the benchmark 10-year government bond rate declined to 4.9%. Jim Reid, global head of macro research at Deutsche Bank, says a “divided government has generally made it harder for fiscal stimulus to be passed,” so a Democratic sweep has slightly eased concerns for the country’s fiscal trajectory. Reid also says investors now price in around 50 basis points of rate rises from the Federal Reserve until 2027, below the pre-election level.

Still, Goldman Sachs analysts argue that Democrats could reverse spending cuts enacted in last year’s fiscal package, which would 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,” they say.

The fall in yields and the dollar boosted gold prices, as a weaker greenback makes the precious metal cheaper and more attractive to overseas buyers. Gold prices jumped 3.5% to $4,079.30 an ounce. Higher gold prices drove up shares in FTSE 100-listed precious metal miners, with Fresnillo FRES gaining 7.0% and Endeavour Mining EDV up 6.2%.

International Stock Market Winners and Losers: Defense Stocks Slide

The election results also raise questions about the United States’ international agenda, including its ongoing war with Iran and its attention to the Russia-Ukraine War. While analysts foresee a new period of increased volatility in policymaking and potential legislative gridlock, they also note that Trump could lean heavily on his presidential veto.

Across the Atlantic, defense stocks were among the biggest fallers on the United Kingdom’s blue-chip index, as investors assessed what this could mean for US government defense spending. London-listed BAE Systems BA stock declined 3.3%, and Babcock International BAB fell 1.7%. Major defense companies across wider Europe also fell, with France’s Thales HO 2.3% in the red, while Italy’s Leonardo LDO dipped 1.0%.

“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 European nations are still being under-appreciated by the market,” says Morningstar’s Michael Field.

The broad STOXX Europe 600 Index rose 1.8% on Wednesday. Danish wind farm developer Ørsted ORSTED was among the biggest gainers, with shares up 4.6%. Other clean energy stocks also climbed on Wednesday morning, with Denmark’s Vestas VWS up 2.8% and German-listed Nordex NDX1 adding 4.8%.

As the results buoyed clean energy shares, oil prices dropped, with Brent crude futures slumping 8.7% to $94.42 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 should 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.