AI crush is powering one stock to sky-high valuations

The 2026 midterm elections have profoundly altered the national regulatory environment, most notably with Democrats securing control of both chambers of the U.S. Congress and notching big victories in traditionally business-friendly states like Texas and South Carolina.

Over the past two decades, Southern states like Florida and Texas have attracted massive corporate migration from blue states. With less regulation and lower taxes. Those same benefits also attracted many people seeking lower taxes, lower housing costs, and better economic opportunities. With this political shift, relocated companies may now face a landscape increasingly focused on energy and building constraints, and tighter legislative oversight.

Information technology, semiconductors, and traditional energy sectors experienced immediate headwinds following the election. Companies at the forefront of the AI boom, such as CoreWeave, Tesla, and SpaceX, saw share prices slide as markets priced in tighter Democratic regulatory oversight and potential restrictions on AI deployment. Senator Bernie Sanders, for example, reposted his efforts to advance a data center moratorium proposal he co-authored with New York Congresswoman and socialist Alexandria Ocasio-Cortez.

The market is suddenly realizing that, between shifts in Washington and in states like Texas, the fastest-growing area of the U.S. economy might grind to a halt. Over half of the U.S. hyperscale data center pipeline could now face heightened regulatory friction. To build new facilities, even assuming they get permitted at all, developers may face tax increases, strict "bring your own power" mandates, or new air-permit delays for on-site gas plants. As all-in construction costs rise and timelines extend, immediate demand for advanced chips snowballs down the hardware supply chain.

Traditional oil and gas majors sank, while solar and green energy stocks surged, driven by expectations that a Democratic Congress will resume pushing subsidies for them. Also, the ongoing U.S.-Israel war with Iran has driven crude prices sharply higher throughout the year. With Democrats taking control of Congress, President Trump faces a legislative body that can severely constrain his military options and push back on defense budgets. Tehran almost certainly recognized that a politically weakened Trump administration would have a greater incentive to seek a negotiated deal, something Secretary of State Marco Rubio has now indicated is preferable to any escalating kinetic options. Consequently, crude prices plunged, with Brent dropping below $95 per barrel.

For similar reasons, defense contractors took market hits due to anticipated congressional resistance to the $1.5 trillion Pentagon budget. Although healthcare - as measured by XLV at least came in today, it remains above pre-election levels, along with grocery stocks such as Walmart, Costco, Kroger, and Dollar General, on expectations that a Democratic Congress might boost federal spending in those areas.

This may help explain why Costco was one of the relatively few stocks to close higher on Thursday, and why it also ranked as the 15th most active single-stock option (in notional terms), ahead of names like JP Morgan, Marvell, Oracle, Eli Lilly, and Dell.

At roughly 46x forward earnings, Costco (a perennial on the "Holly Index (MELLOY, CAN WE LINK TO THIS") isn't cheap, but then it is never cheap. The average forward multiple is actually a few turns higher at over 49x. So what were folks trading? Mostly short-dated call options. One possible reason? Costco isn't just trading at a relatively high multiple; as usual, it is also simply a high-priced stock in dollar terms, at over $1,065 as of Thursday's close. A "round lot" (100 shares) would therefore cost over $100,000 to initiate. Like many things packaged at Costco, that might be a little more than some buyers need (or want) to spend.

Alternatively, call options let investors gain exposure to 100 shares for far less than buying the shares. Buying the January 1060 calls, for example, would cost about $53.45, or $5,345 for upside participation on 100 shares of stock above the $1,060 strike price. That may seem more palatable, but a keen observer might notice that prior highs occasionally present some technical resistance, and Costco topped out at about $1,090 back in mid-May. By selling a call at or near that level, such as the January 1090s at 39.65, one could reduce the cost of the trade even further, expecting a pause before new highs. This would reduce the cost of the trade to $13.80, or just under 1.3% of the current stock price.

I won't pretend $1,380 is a small outlay for a one-lot call spread on a much-loved stock trading at 46x forward earnings. Nor is $520 for 8 6-ounce A5 Wagyu filet mignons (a Costco online only deal available now). But relatively, both the steaks at Costco and the options on Costco are very fairly priced. But it does provide participation in 100 shares of Costco between the strikes, for only 30% more than the cost of a single share of the underlying stock.

Disclosures: Tidal owns/holds all the securities mentioned in the article.

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