Recent Democratic presidents, from Clinton to Obama and Biden, have generally delivered favourable outcomes for investors. Yet the prospect of Democrats taking control of Congress in the midterm elections has triggered a negative market reaction. Are these concerns justified?
Finance, Cryptocurrencies and Healthcare Under Scrutiny
Since Kamala Harris’s defeat two years ago, the Democratic Party has been searching for a new direction. Several of its recent successes have been driven by its more progressive wing, whose leading figures are now seeking greater influence over economic policy.
Among them, Elizabeth Warren could play a major role by taking the helm of the Senate Banking Committee. Her agenda includes tighter regulation of the financial sector, increased regulatory oversight and caps on certain banking fees. While these measures could benefit consumers, they may also put pressure on the profitability of major US banks.
Cryptocurrencies are also high on her agenda. The Democrats most critical of the sector want to strengthen regulation, tighten anti-money laundering rules and introduce stricter oversight of stablecoins. They also intend to examine more closely the links between certain industry players and Donald Trump's inner circle.
In healthcare, ambitions are more varied. Although the most radical proposals to expand the public healthcare system appear unlikely to gain traction, there is broad agreement on the need to preserve and strengthen Obamacare and Medicare. This approach is raising questions among investors in the healthcare sector.
Artificial Intelligence: The Main Source of Concern
By far the sector causing the greatest concern among investors is artificial intelligence (AI). The reason is clear: technology giants alone account for approximately one-third of the S&P 500, while the sector's overall importance extends well beyond that.
Yet the industry has already been facing growing uncertainty for several months. Rising interest rates are making the enormous amounts of capital required for its expansion more expensive and harder to secure. As costs continue to rise, investors are questioning whether such massive investments will ever generate sufficient returns.
The circular nature of current financing arrangements is adding to these concerns. Money flows between large language model (LLM) developers, semiconductor and memory manufacturers, and data centre operators. Each group finances the others on the condition that they use its products. Given the enormous sums involved, investors are increasingly questioning whether such massive capital expenditure is really necessary.
Investors are not the only ones expressing doubts about AI. A majority of Americans, particularly Democrats, believe the sector should slow down. An overwhelming majority also oppose the construction of new data centres close to where they live.
Data centres consume vast amounts of water and electricity, pushing up costs for surrounding households. At a time when the cost of living is a major concern, the issue has therefore become part of the election campaign.
Several dozen local districts used the midterm elections to ask voters to decide whether new data centres should be built in their areas. Only one voted in favour. More broadly, several newly elected governors campaigned on temporary moratoriums on the construction of new data centres.
These include Texas and Georgia, two of the states with the largest numbers of data centres. At federal level, although a nationwide moratorium is unlikely, there is little doubt that new data centre projects will face additional restrictions. These could cover both the impact on local communities' energy supply and other environmental considerations.
The aim would not be to ban data centres, but rather to make their construction and resource consumption more expensive. This could further increase the cost of building data centres and developing AI in the United States.
Financial Markets Are Pricing In the Risk
Naturally, this new approach represents a risk for financial markets. The valuations of many technology companies depend on the rapid expansion of both data centre capacity and computing power. Slower construction and higher costs are not part of their current growth assumptions. Nor is the possibility of weaker demand for semiconductors and memory.
The resulting risk is that the growth rates forecast for the sector may prove unrealistic.
Furthermore, a slowdown in the US AI industry could give China, its main competitor in this field, an opportunity to catch up even faster. Although Chinese semiconductors remain less advanced, they are improving rapidly. Chinese AI models are also making progress and are now only a few months behind the leading US models.
A slowdown in the construction of US data centres could allow China to reach a comparable level in the near future. This is particularly significant because most Chinese AI models are open source and relatively inexpensive. As a result, they could seriously undermine the profitability assumptions underpinning the US AI industry.
At a time when AI accounts for such a significant share of the US stock market, these concerns should not be taken lightly.
What Should Investors Do?
Market concerns about a Democratic-controlled Congress are understandable. The financial, technology, cryptocurrency and healthcare sectors could all face a more demanding regulatory environment.
Nevertheless, these risks should be put into perspective. The interventionist tendencies seen today are nothing new, and the Democratic Party has historically demonstrated its ability to seek compromise. Furthermore, Donald Trump retains his presidential veto power, limiting the likelihood of radical policy changes.
Above all, the US economy continues to show greater dynamism than most other developed economies. While certain regulatory measures could create short-term friction, the second half of Donald Trump's term could also be characterised by greater institutional deadlock and fewer major legislative initiatives — a situation that financial markets have often tended to welcome.
Despite these risks, we continue to regard US markets as an essential component of a diversified investment portfolio and maintain our exposure across all major US asset classes.