The democratic wave was expected, but its scale was not. A veritable tide swept across the electoral map of the United States, sweeping away everything in its path, including historically Republican states such as Texas, South Carolina and Kansas (a first since… 1932). Although not all results are yet available, there is already no doubt that Donald Trump has lost control of the House of Representatives and, above all, the Senate, where the Democrats have so far managed to regain six seats and should therefore hold, at a minimum, a majority of 54 seats. This is already the biggest defeat for a sitting president since 1946, yet it is not entirely a surprise, given that Trump's unpopularity had reached historic levels, against the backdrop of mistrust of his immigration policy, his attacks on institutions and, above all, his war against Iran. Elected to address the high cost of living, the US president has, paradoxically, pursued policies that have helped raise inflation – first by launching a trade war and then by waging a risky military campaign in Iran. This weakness was fully exploited by the Democrats, who focused their campaign message on Americans' purchasing power – a strategy that has now allowed them to take control of Congress in Washington.
However, this victory does not mean that the party will be able to implement its program. In fact, the president of the United States retains the right of veto, which will likely block any law he doesn't agree with. It is true that in the last few hours Trump has expressed his willingness to collaborate with the Democrats, but the political reality and the pressure that his party is destined to exert should dissuade him from granting significant victories to his political opponents in view of the 2028 presidential elections. Furthermore, the Democrats' determination to launch parliamentary commissions of inquiry into the accusations of personal enrichment aimed at Trump is destined to put a strain on relations with the president of the United States and undermine any prospect of cooperation between the legislative and executive powers. The current situation therefore risks leading to an institutional stalemate without significant progress on fiscal policy, which should limit the widening of the budget deficit and thus alleviate one of the factors putting upward pressure on US government bond yields. The risk of this basic scenario is that the final result could be even more favorable to the Democrats, who, according to some projections, could win up to 57 seats in the Senate; in that case, about ten defections among Republicans would be enough to secure the two-thirds majority needed to override a veto or impeach the president, although this scenario remains unlikely at this stage.
Although in recent weeks all attention was focused on the elections for the House of Representatives and the Senate, the real stakes of these elections for the financial markets undoubtedly lay in the race for governor of Texas. In fact, Republican Abbott was considered a leading proponent of data center development, as evidenced by the fact that his state alone accounted for nearly a third of the capacity currently available or under construction in the United States. Although polls showed him as the favorite until last night, he ultimately lost to Hinojosa, a Democratic candidate who made the regulation of tech giants the main theme of her campaign. Added to this are the numerous referendums and local votes in a region that represents 170 of the 300 GW of capacity expected in the United States, the provisional results of which are conclusive, with the adoption of around twenty restrictive measures aimed at slowing down the creation of new data centers.
The initial reaction of the stock indices clearly highlighted this risk, with a significant decline in the Nasdaq (-2%) and the Korean Kospi index (-4%), before they gradually recovered their losses to return to balance this morning. Investors hope that the anti-AI rhetoric was just an election move and that Democrats will prove more pragmatic once in power. In fact, the new Texas governor's program does not include a total ban on the construction of data centers, but rather the introduction of rules aimed at protecting the rights and limiting additional costs for families.
Uncertainty is therefore expected to persist in the short term, while negotiations between the tech giants and new local authorities could lead to potential agreements. However, as visibility improves, investors should regain risk appetite, allowing stock indices to resume their upward trend. In this regard, it is worth noting that the year following the midterm elections, in which power is shared between the two parties, has historically been one of the best times for stock markets. This favorable "seasonal" trend, combined with global economic growth that remains solid, exceptional corporate profits and valuations that have returned to particularly attractive levels, leads us to maintain a positive attitude towards the stock market, while diversifying our allocation across other sectors and geographies, as well as towards the world of fixed income, to take advantage of the decorrelation between the two asset classes.
*Portfolio Manager Multi-Asset & Overlay, Edmond de Rothschild AM*
