Markets cheer Democratic win, betting divided Washington means fewer policy shocks

By Saqib Iqbal Ahmed, Dhara Ranasinghe and Ankur Banerjee

NEW YORK, Nov 4 (Reuters) – Over the past two years, the Trump administration’s sweeping policy shifts in the absence of opposition from a Republican-controlled Congress repeatedly buffeted global markets, from tariffs to the Iran war. On Wednesday, as investors digested a historic Democratic sweep in US midterm elections, markets rallied.

The reason: a bet that gridlock in Washington will curb some of the worst-case outcomes in areas such as the Iran war, even though there were fresh worries, most notably about the backlash against AI infrastructure buildout that has driven economic growth and corporate profits, investors said.

“Gridlock is the market’s friend,” said Mark Hackett, chief market strategist at Nationwide. “Regardless what either side is saying right now, anything that isn’t absolutely necessary is very unlikely to pass in the next two years, which does add to the predictability of the environment for investors.”

Markets have been jittery for weeks about how the election would affect the fiscal outlook, the AI regulatory backdrop and the Iran war, which have raised prices and wreaked havoc in bond and stock markets in recent weeks. Now, investors say they are treating the results as a license to add to risk.

Global stocks rallied, with all three main Wall Street indexes trading higher. Treasuries rose as well, as investors expect divided government to curb government spending, with AI regulation also possibly slowing growth and reducing the need for rate hikes.

The results could also be felt in foreign policy. After the results, US Vice President JD Vance distanced himself from President Donald Trump’s decision to go to war with Iran, questioning its worth and blaming it entirely for the Republican’s electoral rout.

“Investors may be starting to price in a de-escalation,” said Shawn Snyder, economic strategist at Potomac Fund Management.

Market seasonality is also encouraging. Since 1946, the S&P 500 has returned 19.9% on average in the 12 months following midterm elections, according to a Glenmede analysis.

Investors also said the shifting political winds could have positive and negative ramifications for different industries.

“Managed-care organizations and hospitals may benefit if there’s bipartisan support for extending ACA subsidies,” said Angelo Kourkafas, senior strategist at Edward Jones, referring to the Affordable Care Act. “Sectors currently counting on significant deregulation or policy tailwinds, including parts of financials, defense and crypto, may face a less favorable backdrop.”

Kourkafas warned against aggressive sector bets based on the election outcome, however.

FROM AI BUILDOUT TO DEBT

Fears that rapid AI sector growth could be hamstrung by regulatory scrutiny weighed on investors going into the election. Opinion polls showed growing voter opposition to data center construction and AI, and investors expect the Democratic-controlled Congress to apply more scrutiny to the sector.

However, the immediate market reaction has not proved as troubling as some had feared, investors said. Pressure from Democrats might slow the pace of data center construction at a time when investors were starting to worry about the borrowing costs of the buildout.

On Wednesday, shares of deep-pocketed hyperscalers, including Amazon.com, Meta Platforms and Alphabet rose, while shares of data center operators IREN, Applied Digital and Core Scientific fell. Chip stocks also fell, with the PHLX Semiconductor Sector Index sinking 3.6%.

“That’s the market saying we’ve been asking for more of a rational trajectory of spending and now we’re more likely to get that,” Nationwide’s Hackett said.

Democratic gubernatorial wins in all five states Jefferies tracks for data center exposure could leave AI more politically secure, not less, the firm’s strategists said. They expect the new governors to pursue guardrails rather than outright bans. 

That would help blunt any hit to economic growth from a disruption to the AI trade, which has been an engine of expansion, they said.

FISCAL FALLOUT

Treasury yields fell, and oil dropped as the rebuke to Trump’s party raised the odds that the White House will seek to end the war with Iran.

“The oil price drop today is the market saying, ‘you know, the Iran war is deeply unpopular and you’ve got to reevaluate what you’re doing,'” Joseph Zidle, chief market strategist at Cresset Capital, said. 

Oil lost nearly 9% on Tuesday. Should that continue, it “starts to take a lot of inflationary pressure off of inflation, takes pressure off the Fed,” said Zidle.

Democratic control of Congress is likely to mean stronger oversight of fiscal policies and restraint on what Trump can do in terms of increased spending, said Phoenix Kalen, Societe Generale’s global head of emerging markets research.

“That places tighter limits on fiscal policy and should help to ease pressure a bit on US bond yields,” she added.

Bond yields have risen this year due to concern about the steady rise in US debt that recently topped $40 trillion.

Still, a divided government raises the risk of funding standoffs and government shutdowns. Congress postponed a contentious debate over fiscal 2027 spending until after the midterms, setting up a December 11 deadline to reach a funding agreement.

While the market’s first reaction to the election results has been relief, investors still have plenty to worry about.

“The uncertainty of executive actions, spending fights, geopolitical risks, AI policy uncertainty, and the upcoming launch of the 2028 presidential campaign create a significant wall of worry,” Raymond James Washington policy analyst, Ed Mills, said in a note.

(Reporting by Saqib Iqbal Ahmed In New York, Dhara Ranasinghe in London and Ankur Banerjee in Singapore; additional reporting by Lewis Krauskopf, Laura Matthews, Chuck Mikolajczak, Amanda Cooper and Karin Strohecker; Editing by Alexandra Hudson, Kirsten Donovan and David Gaffen)