Investors poised for possible Democratic gains in Congress as US awaits election results

Investors are anticipating potential Democratic gains in Congress following the midterm elections, which could lead to increased market volatility, particularly in the AI trade sector. The outcome of Tuesday's election could have far-reaching implications for areas such as AI data-center buildout, US fiscal outlook, defense spending, and regulation in healthcare, banking, and cryptocurrencies.

President Donald Trump's Republican Party has dominated both chambers of Congress during his second term, while polls indicate Democrats are likely to secure a majority in the House, with the Senate still too close to call.

If Democrats gain a larger majority in the House and Senate, it may put pressure on the technology trade, according to Anthony Saglimbene, chief market strategist at Ameriprise. Prediction markets suggest a 99% chance of Democrats winning the House and a 97% probability of taking the Senate by 8:21 p.m. ET (0121 GMT). Stock index futures have declined on Tuesday evening, with the S&P 500 futures down 0.7% and Nasdaq futures falling 1.4%.

Market strategists believe that a Democratic-led Congress could lead to increased scrutiny over AI companies, potentially exacerbating unease in the AI market.

The AI trade has been crucial to the market, and investors are closely watching the election results for their impact on this sector. Chuck Carlson, CEO of Horizon Investment Services, stated that a Democratic sweep could result in investigations into the technology sector. Investors are also observing governor and other local races in states like Texas, which may have implications for the AI buildout.

The AI trade has been a significant driver of market performance, and this election is expected to have a direct impact on it.

Investors are concerned about potential legislative gridlock should Democrats win the House or both chambers of Congress, which could complicate fiscal negotiations and create uncertainty in the fiscal outlook. Alex Morris, founder of F/m Investments, noted that no candidate campaigned on fiscal responsibility, suggesting that investors may increasingly focus on financial matters.

Previous midterm elections since 1946 have seen the S&P 500 experience gains in the following year in all 20 instances, with an average increase of 14.4%. However, current market conditions have investors questioning this trend, as recent turbulence in tech and momentum stocks indicates that the assumption might be losing its validity.

Seth Hickle, chief investment officer at Mindset Wealth Management, anticipates elevated volatility over the next few weeks, regardless of the election outcome.