The midterms could fuel the K-shaped AI trade

The U.S. midterms could widen the AI divide: tighter data center rules may reward tech giants with capacity in hand and squeeze debt-funded companies trying to catch up.

Democratic victories in key gubernatorial races raised the prospect of tougher scrutiny for data center projects, adding to investor concerns about how quickly new capacity can be built and financed.

In Texas, Democratic governor-elect Gina Hinojosa has proposed a statewide moratorium on new data center permits, although projects already under construction would reportedly be exempt.

As the markets digested the results on Wednesday, Microsoft and Amazon each surged more than 6%, while AI infrastructure provider CoreWeave plunged around 10%. Chipmakers Micron and Nvidia fell 7% and 3.17%, respectively.

Differences in borrowing costs are playing a key role in the split, James Sullivan, managing director and co-head of global fundamental research at JPMorgan, told CNBC's "Squawk Box Asia" on Thursday.

Sullivan said borrowing spreads have widened significantly for neocloud companies, leaving their cost of additional capital substantially higher than that of hyperscalers that benefit from more diversified customers and revenue streams.

"The fact that you're seeing this bifurcation in equity performance is largely driven by the view that existing capacity is significantly more valuable now because of incremental supply constraints," he said.

Data center risks

The midterm results could reinforce that view if they make new projects more vulnerable to permitting delays.

BMI warned that a sharp slowdown in data center construction and AI investment could produce a greater-than-expected decline in overall investment, The Business Times reported, citing the firm's post-midterm analysis.

The potential impact is uneven across the construction pipeline. Much of the data center capacity expected to come online in 2027 is already under construction, limiting the near-term impact of new restrictions.

Projects planned for 2028 face greater exposure to permitting delays and regulatory uncertainty, investment bank Nomura said in a note Wednesday about the midterm results.

Tighter regulations on data center construction could become a more significant headwind to AI investment from 2028, the firm said.

AI financing gap

Shares of Nvidia-backed neocloud CoreWeave, Nebius and Iren fell at least 30% in October, as tightening credit markets raised questions about how AI infrastructure projects would be financed. CoreWeave's five-year credit default swap spread has surged past 1,100 basis points, reflecting rising costs for investors seeking protection against a potential default.

The distinction may be how well companies can absorb delays and fund the capacity they do build. Hyperscalers have broader cloud businesses and more internally generated cash flow, while lower-rated neoclouds face greater exposure to borrowing costs, energy prices and refinancing conditions, JPMorgan Asset Management said in an Oct. 20 research note.

The asset manager said financially stronger hyperscalers could also secure cheaper capacity or acquire assets if weaker operators scale back.