Investors are assessing how a possible shift in control of the US Congress could affect markets as voters head to the polls in Tuesday’s midterm elections. Attention is focused in part on whether a strong showing by Democrats could add to volatility in asset prices, particularly in the artificial intelligence sector.
The vote comes as a sharp decline in AI stocks has unsettled investors. The election could also affect sectors exposed to policy decisions, including the expansion of AI data centers, federal fiscal policy, defense spending and regulation of healthcare, banking and cryptocurrencies.
Republicans, the party of President Donald Trump, have controlled both chambers during the first two years of his second term. Polls suggest Democrats are likely to win the House of Representatives, while the Senate contest remains close.
Citigroup equity strategist Scott Chronert said a Democratic victory is increasingly expected, but close Senate races leave open the possibility that Republicans retain the chamber—or that Democrats perform better there than anticipated. He said markets would likely react positively in the first scenario and negatively in the second.
UBS Global Wealth Management strategists put the probability of Democrats winning both chambers at 50%. They assigned a 40% chance to Democrats taking the House while Republicans keep the Senate, and a 10% chance that Republicans retain control of both.
A Congress led by Democrats could increase scrutiny of the administration and make fiscal negotiations more difficult, UBS chief investment officer Mark Haefele said. It could also bring greater oversight of technology companies, as opposition to AI data centers grows. Analysts cited in the report do not expect viable legislation to seriously derail data-center expansion, regardless of the election outcome, but anticipate investigations into the technology sector if Democrats win.
Despite heightened stock volatility in recent sessions, options traders are not positioning for a major market swing after the results. Options on the S&P 500 imply a move of about 0.8% in either direction on Wednesday, slightly above the average implied daily move of 0.6% over the past month, according to ORATS data.
Joe Tigay, a portfolio manager at Equity Armor Investments, said markets could become more volatile once the outcome is clear, but cautioned that the uncertainty may not disappear immediately. He added that election-related hedges may expire, while geopolitical risks remain.
Sources: Folha Mundo.