The Texas governor's race might be a make-or-break contest for a wobbling AI trade

By Joseph Adinolfi

Democrat Gina Hinojosa, the candidate in the Texas governor's race, remains the underdog

AI stocks could sell off if Democratic Rep. Gina Hinojosa (right) prevails against Republican Gov. Greg Abbott (left) in Texas.

Democrats are favored to take both the House and Senate in Tuesday's U.S. midterm elections, but there is another race to which artificial-intelligence investors should be paying close attention.

Several analysts and traders flagged the Texas governors race as the contest with perhaps the highest stakes for the U.S. equity market. Election Day is arriving at a critical time for the AI trade. Semiconductor stocks SOX and shares of other companies that have benefited from the buildout have struggled recently as investors ponder whether the voracious pace of data-center spending might already be peaking.

Worries that growing political opposition could stymie the buildout have also contributed to recent market pain.

Texas has the most data center projects in the U.S., and is ranked first by gigawatts under construction, according to MacroHive data. It has also seen a groundswell of grassroots support in some communities for more restrictions on new data centers.

Of the two major candidates, Democratic State Rep. Gina Hinojosa would be expected to take a tougher line on data centers. While she is believed to be the underdog, according to Polymarket data, her perceived chances of success have been improving - even as Republican Gov. Greg Abbott has remained the front-runner. (MarketWatch publisher Dow Jones has a data partnership with Polymarket.)

A New York Times/Sienna poll released on Monday showed Hinojosa with a razor-thin edge over Abbott. On Sunday night, analytics firm AtlasIntel projected that Abbott would lose. Worries about a Hinojosa victory may have contributed to tech's big intraday reversal on Monday.

The tech-heavy Nasdaq Composite COMP finished lower, while its sibling, the Nasdaq 100 NDX, slipped into correction territory.

"Two smart people I know from Texas are both telling me the Texas governor's race is a big deal for AI," wrote Brent Donnelly, president of Spectra Markets, in commentary recently shared with MarketWatch.

Abbott has spent years positioning Texas at the epicenter of the U.S. data-center boom. But more recently, he has yielded to political pressure, directing the Texas Commission on Environmental Quality in September to halt all new permits for data-center projects until an audit can be completed.

His rival, Hinojosa, has campaigned on a broader data-center moratorium until state lawmakers can enact permanent rules, which could affect projects already in development, Donnelly said.

Analysts at FxPro warned that Democrats taking both the House and the Senate could give investors one more reason to sell tech stocks and the U.S. dollar.

"There is a high risk that the Democrats will tighten regulation of the artificial intelligence sector," they wrote.

Others on Wall Street were taking a more optimistic tack on the midterms, with top strategists at Citadel Securities and Morgan Stanley recently saying that tech stocks could rally after the midterms regardless of the outcome.

"Everyone is using the midterm elections as a level that is a clearing event for risk, and specifically I think that's the period when AI can outperform again," said Citadel Securities' Scott Rubner during an interview with Bloomberg.

The governor's race in Georgia is another one investors should be watching, according to MacroHive. Democrat Keisha Lance Bottoms, who is favored to win, has campaigned on a statewide data-center pause.

-Joseph Adinolfi

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(END) Dow Jones Newswires

11-03-26 1044ET