AI data center stocks dip, renewables surge after Democrat sweep in US midterm elections

On Wednesday, data center stocks experienced a decline in premarket trading, while clean-energy stocks surged following the Democratic Party's victories in the US midterm elections. Democrats secured control of both the Senate and the House, marking a significant victory in traditionally Republican areas such as Kansas for the first time in many years. Notable elections included Texas and Georgia, both key states for data centers due to their capacity to host extensive facilities.

This electoral outcome promises a divided government in Washington, a stark contrast to the previous two years when the Republican-controlled Congress hesitated to exercise power to curb President Donald Trump's activities. The market reaction echoed across various sectors, including AI-linked stocks, renewables, healthcare companies, and prison operators.

Data center operators faced a setback, with Core Scientific declining by 2.8% and Iren dropping 1.4%. Applied Digital and CoreWeave also saw minor declines. Analysts expressed concerns that tighter Democratic oversight might curb the momentum of data center construction, despite doubts about any legislation's ability to significantly impede the process. Kit Rees, an investment strategist at Quilter, noted the potential for increased hearings and investigations into the AI buildout under a Democratic-led Congress.

On the positive side, clean-energy sectors benefited from the Democratic sweep. Solar maker First Solar experienced a 9.4% increase, residential solar installer Sunrun jumped 10%, and inverter maker Enphase Energy rose 7.6%. Clean-power developer NextEra Energy also posted a modest gain of 2.2%. The economic incentives for clean energy development were highlighted by Paul Jackson, a global market strategist at Invesco, who emphasized that rising oil and gas prices further bolster the case for expanding renewable energy sources.

The surge in clean energy stocks extended beyond the United States, with European companies like Vestas and Orsted seeing a rise of 5% and 7%, respectively, while Portugal's EDP Renewables climbed 4.4%. However, shares of Elon Musk's SpaceX and Tesla, both companies led by the influential entrepreneur, suffered losses. SpaceX dropped 3.2%, while Tesla fell 3.6%.

This decline raises concerns about the potential merger between SpaceX and Tesla, as the scrutiny from Democrats could slow down the process. Musk's political enemies now control Congress, potentially affecting stocks linked to him. Trump Media & Technology Group, majority-owned by Trump, experienced a 7% decline.

Defense stocks, including Northrop Grumman, RTX, Lockheed Martin, and L3Harris, witnessed declines of over 5% each. This sector had previously benefited from expectations that the $1.5-trillion budget request by Trump would remain intact in a Republican-dominated Congress. However, a Democrat-led Congress might lead to funding shortfalls.

Healthcare insurers and hospital operators also saw gains, with HCA Healthcare and Universal Health Services increasing by 3.7% and 2.2%, respectively. Insurers such as Centene and Molina rose by 4.5% and 6%, respectively.

Analysts noted that Democrats may lack the necessary numbers to pass legislation restoring major parts of the Affordable Care Act. Nonetheless, they could still secure concessions during negotiations over defense spending and government funding. Prison operators, such as GEO Group and CoreCivic, experienced a decline of 6.7% and 5.2%, respectively, reflecting the historical correlation between increased illegal immigration under Republican administrations and the demand for detention facilities.