With Democrats now securing control of both chambers of Congress, markets have begun reacting to the potential implications for US fiscal policy, geopolitical developments, and regulatory oversight.
The initial relief rally is now giving way to a more selective phase. With Democrats controlling both chambers, Washington moves towards gridlock for the final two years of this administration, and markets are already pricing what that means. It means less room for new tax cuts and deficit-funded spending, lower Treasury yields and a softer dollar. That mix, with potential easing of tensions with Iran, has lifted gold back above $4,100 an ounce. Brent’s slide below $100 matters just as much. Cheaper energy eases the inflation pressure that has kept the Federal Reserve on a restrictive path, which makes Friday’s US jobs report the next key test for rates.
For equities, the next phase is about where federal money flows. The fast-track route for the administration’s extra $350bn defence request effectively closes, capping upside for some defence stocks. Democrats also gain leverage to delay scheduled Medicaid cuts, supporting hospitals and Medicaid-focused insurers. Lastly, crypto intermediaries face a longer wait for a clear regulatory framework with the stalled CLARITY Act.
The theme we are watching most closely is AI scrutiny. We anticipate more congressional hearings on who pays for the power-hungry buildout. But the biggest swing of the midterms was in the states’ political leanings. Texas, which now has more data-centre capacity operating or under construction than any other state, has elected a governor who campaigned on pausing new projects, ending data-centre tax breaks and making developers cover their own power costs. With the Texas legislature now split between a Democratic House and a Republican upper chamber in Austin, we see higher costs and slower approvals as more likely than an outright ban.
That favours scale. Hyperscalers such as Microsoft and Alphabet have the deep pockets to absorb new rules and secure their own power, and Microsoft already committed in January to pay its full electricity costs and forgo local tax breaks. Wednesday’s trading reflected this: the hyperscalers rallied while smaller data-centre operators such as IREN and Coreweave fell more than 10%. The AI trade is not ending, but it is becoming far more selective.
