San Francisco, New York. The Democrats’ “blue tsunami” in this year’s midterm elections could significantly limit the expansion of artificial intelligence (AI) infrastructure. Numerous Democratic candidates had made resistance to data centers a dominant election campaign issue.
This also clouds the prospects of many tech companies that are currently investing billions in AI infrastructure. Yorkville tech investor Dan Ives believes Democrats' control of Congress, particularly the Senate, is likely to create significant hurdles for legislation over the next two years. “There’s no sugarcoating this.”
The Democrats' election victory on Wednesday caused what at first glance seemed like a paradoxical reaction on the markets: although construction freezes and regulation meant headwinds for the entire industry, the AI sector was divided into losers and winners.
While the prices of neocloud providers such as CoreWeave slipped, the shares of hyperscalers rose significantly despite the supposedly bad industry news. Amazon and Microsoft, for example, gained over six percent, Alphabet gained over three percent after last week's significant losses, and Meta gained 1.4 percent.
In contrast, CoreWeave was one of the biggest losers in the technology-heavy Nasdaq 100, with a loss of almost ten percent. Nebius, another neocloud provider, also lost over six percent, and Applied Digital almost seven percent.
How does that fit together? Of all companies whose data centers were targeted in the election campaign, the companies are making gains - while the pure data center companies are losing. Three differences help explain the seemingly contradictory reaction.
For neoclouds like CoreWeave, Iren or Nebius, which build and rent computing power for AI companies, expansion is not a means, but an end: every data center that fails due to resistance from voters is missing. The already very optimistic growth story is being cast into doubt.
Tech analyst Dan Ives estimates that five to ten percent of the planned 800 to 1,000 US data centers could fail due to political headwinds. Microsoft, Amazon and Google, however, make their money by selling cloud and AI services. The expansion is on the cost side for them. In the value chain they are above CoreWeave and Co.
If the Democrats are now able to force a slower pace of expansion, this will hamper their billions in investments - for shareholders who have been complaining about the avalanche of costs for weeks, this is not a threat, but a relief. Analyst Ives puts it this way: Some tech investors even see the election as slightly positive because Big Tech now has to “put the brakes on”.
The message for investors is: Every dollar that companies do not invest in new servers or new chips remains in the cash flow. And it had recently suffered significantly from the high AI investments. Analyst firm Capital Economics estimates that hyperscalers' combined investments could exceed their cash flows in the third quarter - the first time ever in a cycle.
The US bank Goldman Sachs predicted that $1.2 trillion could flow into AI expansion next year. This number could now be significantly lower. From the perspective of Capital Economics chief economist Jonas Goltermann, it is therefore understandable that the possibility of a slowdown in the investment freeze is positive news.
The large tech companies, also known as hyperscalers, largely finance their data centers with the immense profits of their core business. Google continues to earn billions from the ads in its internet searches. Anyone who already has capacity on the network also benefits when new capacity becomes scarce.
The challengers, on the other hand, rely on credit and preliminary contracts: Nebius' financing depends on long-term contracts with solvent major customers, Irish's most important Microsoft contract is serviced from Texas. CoreWeave's creditworthiness is increasingly in question in the high interest rate environment. Evercore analyst Amit Daryanani warns that a more restrictive environment for new data centers could “add additional strain” to the already depressed sentiment for these stocks.
The Bank for International Settlements (BIS) explicitly pointed out this risk in its annual report: If the hyperscalers slow down or stop their aggressive investment pace, many borrowers along the supply chain could have difficulty making up for their lost sales and servicing their debts.
This effect is also felt by chip manufacturers, whose sales largely depend on the further expansion of the infrastructure. This also explains their price losses on Wednesday: The Philadelphia Semiconductor Index, which tracks the development of the largest chip and semiconductor companies, fell by over three percent after the election results. Nvidia shares lost more than three percent. Semiconductor suppliers such as Coherent and Marvell were also caught in the downward spiral and temporarily lost up to eight percent.
Here's where it gets specific: Goldman Sachs assumes that the states in which the Democrats are threatening restrictions account for around 45 percent of the planned data center capacity in the USA. In Texas, where, according to Ives' estimate, 25 to 30 percent of the planned data center capacity will be built, Gina Hinojosa, an outspoken critic of the expansion, will rule in the future; they are joined by Senator James Talarico. The elected Republican Greg Abbott had already imposed a ban on connecting new data centers to the power grid in August - which Trump publicly called a mistake.
On the stock market, this was seen as an episode that would end after the election. Now the opposite is true. In Ohio, Sherrod Brown won, attacking his opponent as “the face of data centers” and wanting to remove operators’ tax privileges; At the same time, 14 municipalities in the state voted for bans or requirements, including Sunbury against a planned Amazon data center.
In Michigan, Abdul El-Sayed won with the promise to let data centers pay their own electricity costs. The driver is the same everywhere: In the country's largest electricity market, the so-called PJM region on the east coast, the independent market monitor attributes 63 percent of the recent price increase to data centers - $9.3 billion, paid by customers.
None of this is an all-clear for consumers. Electricity costs are likely to continue to rise regardless of the election outcome because demand is outpacing supply: hundreds of data centers are competing in parallel for network connections, space and electricity; according to Reuters, the capacity under construction is already 48 percent higher than last year - new power plants, however, take years. The consulting firm ICF expects household tariffs in the PJM region to be 30 to 60 percent higher by 2030, politics or not. The anger of voters on Tuesday will potentially be replenished.
However, there is unlikely to be a major counterattack. Despite their victory, the Democrats would not be able to implement a national ban or moratorium. Every tough law fails because of Trump's veto. The analysts at Barclays bank therefore call such concerns unrealistic.
The Democrats' levers lie elsewhere. In Congress, for example, where they can now enforce investigative committees with the right to subpoena, which minority leader Hakeem Jeffries is already having examined. Or with tax breaks for tech companies, which become a bargaining chip in every budget negotiation. Tariffs, permits and network connections are added in the states – where the new governors are based.
Added to this are the political realities that even the Democrats cannot escape. A slower expansion could give China a lead in the AI competition with the USA. According to Ives, this would create a “balancing dynamic” among Democrats.
Analysts at Goldman Sachs even assume that the topic will become less important in the coming months. If the moratoriums actually come into force, the bank believes they would not last long.
Of course, the expansion of AI does not end there. It's becoming more expensive, slower, and it's moving to states where people still want it. For the big guys, this is a calculable price. For those whose only product is expansion, however, the business model is at stake.
