Investors ready for possible shake-up in Congress as US awaits election results

NEW YORK: Investors were bracing for a potentially strong Democratic showing during Tuesday's midterm elections that could pave the way for greater volatility in asset prices, particularly the AI trade, which has been a main driver for stocks.

Tuesday's outcome could hold broad implications for market-sensitive areas including the AI data-center buildout, the US fiscal outlook, defense spending and regulation in areas such as healthcare, banking and cryptocurrencies.

President Donald Trump's Republican Party has controlled both chambers of Congress during the first two years of his second term. Opinion polls show the Democrats are likely to take the House, while the Senate is too close to call.

"While probabilities increasingly favor a Blue sweep, several tightly contested Senate races leave open some possibility of Republican control of the Senate or, conversely, a greater than expected Democratic foothold in the Senate," Scott Chronert, US equity strategist at Citigroup, said in a research note ahead of voting. "Equity market reaction is likely positive in the former case and negative in the latter."

Prediction market prices implied a 94% chance of Democrats taking the House, and a 74% chance of winning the Senate as of 4:23 p.m. ET/2123 GMT on Tuesday, according to pricing data from the major markets aggregated by analytics firm BetInt.

In Tuesday trading ahead of polls closing, the S&P 500 equity index .SPX ended up 0.4%, helped by a rebound in recently hit AI and tech stocks. The yield on the benchmark 10-year Treasury rose to 4.96%, while the dollar edged higher against a basket of currencies.

"I think any outcome that is in line with the prediction markets or the polls should be largely priced in at this point," said Chun Wang, director of multi-asset strategies at the Leuthold Group, an asset management firm.

"I wouldn’t be surprised to see a relief rally from this point on, if we have certainty in terms of the outcome."

With equity volatility rising in recent sessions, option-market traders on Tuesday were bracing for a move of 1%, in either direction, in the S&P 500 on Wednesday, above the 0.6% average implied daily move over the past month, ORATS data showed.

The midterms come at a fragile time for markets, with a swoon in AI shares causing investor unease that could be exacerbated by the election results.

A Democratic-led Congress could exert greater scrutiny over AI companies, in part due to growing public opposition to data centers, a risk for a market that has been lifted by such investments. While analysts see slim chances of viable legislation that would severely undermine the data-center buildout, they expect a Democratic sweep to lead to investigations into the technology sector.

Investors were also watching governor and other local races in states such as Texas for their implications for the AI buildout.

"The AI trade has been so important to the market, and this election will have some direct impact on that," said Chuck Carlson, chief executive officer at Horizon Investment Services.

Many investors have said they are eager to get past the elections, which have hung over the markets for the last several weeks. In midterm years since 1946, the S&P 500 has been higher 12 months after Election Day in all 20 instances, with an average gain of 14.4%, according to Deutsche Bank.

"We could see some volatility come out once there is a clear result, but I wouldn’t assume all that uncertainty disappears Wednesday morning," said Joe Tigay, portfolio manager at Equity Armor Investments. "Election hedges can expire; geopolitical risk doesn’t have an expiration date."