How a midterm sweep by Democrats could turn this tech selloff into a tech crash

By Joseph Adinolfi

Popular AI names are under pressure again this week - but the pain could worsen after the Nov. 3 election

Democratic leadership in Congress and in governors' mansions could be a problem for investors in hot AI stocks.

Investors appeared to be shaking off the latest "tech wreck" on Thursday, as many hard-hit names linked to the artificial-intelligence trade staged a strong rebound intraday.

Some stocks - like CoreWeave (CRWV), for example - that had found themselves at the center of the storm earlier this week managed to finish the day higher. Earnings season is just getting underway, and Wall Street analysts are expecting another blockbuster quarter.

But even if another round of strong corporate results manages to deliver a boost to the AI trade, a Democratic sweep in next month's midterm elections could create more problems down the road.

Ben McMillan, CIO at IDX Advisors, said he has been keeping a close eye on polls at the national and local level as the drumbeat of anti-data-center rhetoric has picked up.

"It seems like going after the AI data centers is becoming a centerpiece for the Democrats, and that is a very real risk for the AI trade," McMillan said. "Everybody clearly got the talking points."

If Democrats do prevail on Nov. 3, McMillan believes semiconductor stocks and other names benefiting from the AI build-out would fall even farther.

To be sure, slowing the breakneck AI build-out doesn't only resonate with Democrats: Local resistance to data centers is emerging as the rare bipartisan concern in the U.S. Even communities in red states like Texas have seen organized popular resistance to some projects.

All eyes on Texas

Polls and betting markets like Polymarket suggest Democrats have a strong chance to take back control of the U.S. House of Representatives. Recently, the Senate has looked increasingly within their reach as well. (Polymarket has a data partnership with Dow Jones, the publisher of MarketWatch.)

With President Trump in office, Democrats at the federal level probably wouldn't make much immediate progress in their push to regulate AI, according to strategists at Evercore ISI - although a major AI safety incident could change that, they noted.

But if Democrats take even more seats in Congress than expected, it could bring 2028 policy risks into focus sooner, the Evercore team said. Investors would need to start thinking about what unified Democratic control in Washington might mean for proposals like a nationwide data-center moratorium, restrictions on frontier-model development or steep new taxes on tech firms.

At the same time, races at the local level could have an outsize impact, including contests for control of the governor's mansion and state house. Seven of the top 10 states for data-center construction will hold gubernatorial elections next month, according to equity strategists at Wells Fargo.

The race for the governor's mansion in Texas could emerge as particularly important, the Evercore team noted. Republican Gov. Greg Abbott has already put a temporary moratorium on new data-center approvals in place, although the project pipeline in the state remains robust.

Should Abbott win re-election, the Evercore team expects the outlook for the data-center buildout in the state would become clearer, and that credible projects with local support would likely be allowed to move forward. However, strategists from 22V Research said that even if Abbott wins, regulatory review and air-permitting delays could slow down new project approvals in the years ahead.

Meanwhile, a surprise victory by Democrat Gina Hinojosa would likely see the moratorium prolonged indefinitely, delivering a major roadblock in the state with the most AI data-center projects, according to figures from 22V Research.

Beyond Texas, the team at 22V Research already expects other states to turn increasingly hostile toward data centers. The number of data-center-friendly states is expected to shrink from 27, according to 22V's current count, to about 15.

Shift to healthcare

Ohsung Kwon, chief equity strategist at Wells Fargo Securities, also believes a Democratic sweep would be bad for the AI trade. If the Democrats do establish solid majorities in both the House and Senate, Kwon and his team expect software names and shares of so-called hyperscalers will climb, while semiconductors could struggle.

At the same time, a Democratic sweep could help boost healthcare stocks particularly shares of insurers and hospital operators.

Investors have already seen signs of a rotation away from AI highflyers and into hard-hit healthcare stocks. This week, the healthcare sector XX:SP500.35 is on track to be the best performer among the S&P 500's 11 sectors - with information technology XX:SP500.45 being the worst.

-Joseph Adinolfi

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10-16-26 0649ET