U.S. midterms: Citi breaks down implications for economy and markets

Citi has broken down the implications of the U.S. midterms for the economy and markets. Democrats gained significant control of Congress, securing both the House and Senate. This control will shape U.S. economic policy and AI investment as the 120th Congress begins on January 3, 2027.

Living-cost frustration and concerns about AI infrastructure have contributed to the Democratic victories. U.S. consumer prices have risen 30% since the pandemic, with pandemic-era inflation driving much of the increase. Republican expectations for inflation remain lower than when Donald Trump took office.

However, fewer than 30% of Americans support AI deployment at its current pace, citing concerns such as data centre construction, grid strain, higher electricity bills, and job losses. Since the launch of ChatGPT, residential electricity prices in the five states with the most data centers have risen nearly 20%.

Democrats won gubernatorial races in Texas, Ohio, and Georgia. Markets have become more cautious, questioning whether opposition could lead to tighter regulation and slower AI spending. This uncertainty has added volatility to U.S. equities, particularly AI-linked shares.

Citi sees limited scope for federal reversal due to Democrats lacking veto-proof majorities or the 60 Senate votes needed to overcome a filibuster. However, there is greater potential for state and local restrictions, such as removing data centre tax incentives, shifting electricity costs to operators, and siting rules that favor brownfield industrial sites.

The AI boom's sustainability is crucial for businesses, which are investing to improve productivity and profitability. However, public opposition and regulation could delay data centre projects and slow AI investment. While these constraints could ease in the long term, they may give existing bottlenecks time to ease.

Citi expects regulation to change the location, cost, and pace of infrastructure development rather than halt the AI investment trend. Investors will closely monitor AI capital expenditure and state rules that could raise costs or delay projects. The election has shifted the political environment but may not fundamentally alter the U.S. economic policy trajectory.