Markets brace for AI crackdown after Democrats sweep US midterms

Global technology stocks experienced volatility after the US Democratic party secured a sweeping victory in the midterm elections. The Democratic Party's control of both the House of Representatives and Senate gave the party greater capacity to shape domestic US policy, potentially posing challenges to President Donald Trump's agenda.

In the United States, legislation requires approval by both houses of Congress before being signed into law by the President. Democratic gains in Texas and Kansas represented significant upsets, as voters in these traditionally Republican-leaning states elected Democratic candidates.

Data centers utilizing AI technology have emerged as a contentious issue in Texas, where residents are concerned that the sprawling facilities could overwhelm the state's already fragile power grid. Industry experts, such as Kit Rees, an investment strategist at Quilter, warned that the sector could face heightened regulatory scrutiny following the Democratic sweep.

Asian markets responded negatively, with tech firms recording steep declines. Japan's Nikkei 225 fell 3.6% to its lowest level since early May, while OpenAI investor Softbank and memory chipmaker Kioxia Holdings both saw double-digit percentage drops. South Korea's Kospi managed to end the trading session slightly positive, buoyed by Samsung's rebound from early losses.

Analysts anticipate further rotation out of tech stocks, as regulatory pushback at the state and local levels may delay data center construction projects. Stephen Brown, chief North America economist, cautioned that federal regulation could pose an even greater risk to the AI trade, potentially slowing AI adoption and AI-related earnings growth.

Wall Street futures were also negatively impacted, with the tech-heavy Nasdaq and broad-based S&P 500 forecast to experience declines. Ipek Ozkardeskaya, senior analyst at swissquote, suggested that the Democratic victory might lead to a shift towards non-technology sectors and a slowdown in earnings growth for the "Magnificent Seven," a group of influential US technology and growth stocks.

Deutsche Bank analysts reported a clear sell-off in US equity futures, primarily driven by the tech sector, with investors anticipating potential regulatory changes under Democratic congressional control.