As Vistra and other energy stocks slide, some analysts warn of an 'excessive knee-jerk' reaction

By Claudia Assis

Energy stocks have already been under pressure, and newly elected officials may not slow the data-center boom as much as feared

Constellation Energy's LaSalle nuclear power plant in Illinois. Deep stock losses hit power producers such as Constellation and Vistra on Wednesday.

The blue wave that swept Congress is leaving a slew of energy-related stocks in the red on Wednesday, with investors worried about more regulation for the sector and a potential slowdown in the data-center buildout.

The Democratic midterm sweep was "a significant policy shock," one that adds "considerable" uncertainty to the artificial-intelligence buildout, analysts at Raymond James said in a note.

But analysts say it's possible the extent of Wednesday's selloff might be too severe in light of pressure on energy stocks even before the midterms and a belief among some on Wall Street that much data-center work will get to continue unabated.

Some of the notable stock reaction was coming from power producers more exposed to Texas's grid operator, ERCOT.

Vistra's stock (VST) was among the most battered on Wednesday, down around 14% toward its lowest close in more than 18 months. Shares of other power producers, such as NRG Energy (NRG) and Constellation Energy (CEG), followed suit, dropping 13.5% and 6.7%, respectively.

Independent power generators have been seen as eventual winners in an environment where AI-related power demand - and electricity prices - are on the rise.

The Raymond James analysts cautioned against the potential for an "excessive knee-jerk selloff," however.

"We remain constructive on the longer-term electricity and natural-gas demand opportunity, but the timing, geography and economics are increasingly uncertain," they said.

In Texas, Gina Hinojosa defeated Gov. Greg Abbott to become the state's first Democratic governor in more than 30 years as well as its first Latina governor.

Texas, alongside Virginia and California, leads the nation in terms of hosting operating data centers and planned facilities.

Analysts at Wells Fargo said in their note Wednesday that Texas is home to about 20% of the cumulative U.S. data-center pipeline and close to 30% of planned gigawatt additions through 2028, noting that Hinojosa won on a pledge to hold off on new data centers until the state legislature meets in January.

Abbott had already put a halt on permit approvals pending state-agency reviews.

Related: Tesla and SpaceX shares slide as Musk's political push falls flat

Data centers are unpopular across the political spectrum, with winning candidates campaigning on affordability and infrastructure concerns related to their growth.

But the common policy thread at the state level is more about cost allocation - large energy consumers pay 100% of their power consumption - than a simple rejection of load growth, analysts at Evercore ISI said in their note.

"We read the result as a pace-and-returns risk including moratoria, permitting pauses, fixed-charge and potentially [return on equity] pressure rather than a reversal of the demand thesis," the Evercore ISI analysts said.

Ira Joseph, a senior research associate at the Columbia University's Center on Global Energy Policy, told MarketWatch that Texas always has had an energy policy that's focused on a more pragmatic, "all of the above," approach.

"Data-center demand growth in West Texas, which is not a particularly populated area of the state or of the country, will continue to move ahead," Joseph said. If you're going to build data centers, it makes sense to build them as close to the source of the generating fuel as possible, he added.

Newly elected Texas politicians are also unlikely to change oil and gas policies, he said, with the exception of potentially stricter rules on flaring and venting for natural gas, he said.

The Democratic sweep, however, does have the potential to affect issues around the war with Iran, and by extension the global oil and gas production, Joseph said.

"There's going to be more pressure on the administration to end the war, make peace and solve some issues," he said. Same with the Russia-Ukraine conflict, he added.

Analysts at RBC said that they didn't believe that the Trump administration's Iran policy would shift "materially" despite Republicans losing both chambers to Democrats.

The administration "likely keeps the blockade and threatening strikes while testing if latest diplomatic attempts can land a deal" and swap some control over the Strait of Hormuz for nuclear constraints, they said.

"If Iran stays rigid, escalation to break the stalemate is more likely than not," likely done through "surgical" strikes, the said. Democrats could cut war funding, but lame-duck Republicans will likely increase defense spending before January, the analysts added.

"History suggests Congress won't defund the war either - during the Iraq war, Congress never cut funding despite voting to end it, and Bush deployed troops even after losing both chambers," they noted.

Renewed expectations of a deal dragged down oil prices on Wednesday, with London-traded Brent futures (BRN00), the global benchmark, down more than 8%.

"We see crude-oil markets settling into a 'higher-for-longer' regime, with fair value for Brent crude oil remaining in the $90-$100 [a barrel] range, and potential for upside via risk premium so long as the Middle East and Russia-Ukraine conflicts remain unresolved," analysts at TD Cowen said.

Don't miss: Micron and other chip stocks slip as election results strike at the core of data-center optimism

-Claudia Assis

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11-04-26 1939ET