A Democratic victory is seen as bad news for AI stocks. Why does Goldman Sachs disagree?

Sentiment toward artificial intelligence stocks has been decidedly negative in recent weeks, and the results of the U.S. midterm congressional elections may lead some investors to believe that the sector’s worst fears have been realized, according to MarketWatch. However, a Goldman Sachs strategist takes a different view of the situation, the publication notes. A Democratic Party victory may not slow down—but rather accelerate—companies’ capital expenditures, according to Rich Privorotsky, head of European equity trading at Goldman Sachs.

“Microeconomic indicators remain strong, electoral uncertainty has eased, and the market has cooled off” following the sell-off in AI stocks, noted a Goldman Sachs strategist. At the same time, he believes that short sellers will now have to close their positions and lock in profits.

MarketWatch notes that, ahead of the election, most of investors’ attention was focused on whether a Democratic victory would halt the construction of data centers. Particular attention was paid to the gubernatorial race in Texas, where about a quarter of all facilities were planned to be located and where the incumbent governor—Republican Greg Abbott—lost his reelection bid to his Democratic opponent, Gina Inohose, suggesting a stricter regulatory environment for the AI sector.

Nevertheless, Privorotsky believes that hyperscalers could accelerate their plans and bring forward their investments to 2027 in order to take advantage of the current permitting rules before the requirements become stricter.

Furthermore, according to the strategist, if the expansion of future infrastructure is limited, this will only increase the value of existing capacity that is already operational and connected to networks. This benefits corporations such as Amazon, Microsoft, and Alphabet, which already have infrastructure in place.

A delay in the construction of some data centers could hurt chipmakers and energy providers, the strategist acknowledges, but the stocks of these companies have already fallen significantly. For example, the SOX exchange-traded fund, which tracks the semiconductor manufacturers’ index, has lost a fifth of its value over the past month.

As evidence that companies continue to invest heavily in AI, the strategist cites AMD’s financial results: the third-quarter results were strong, and the forecast for the fourth quarter calls for a 27% acceleration in growth. Privorotsky believes that the limited supply of hardware will not so much destroy demand as it will keep prices high for a longer period of time.

The strategist believes that even if corporations have ordered excess infrastructure to account for potential delays, the market has already factored this in through the current decline in stock prices. For cloud providers such as Nebius and CoreWeave, the situation is slightly more complicated and largely depends on whether they have signed contracts for capacity or whether that capacity already physically exists.

Privorotsky also notes that tension on the stock market will soon subside. The so-called fear index (VIX), which reflects the level of panic and volatility in the market, is unlikely to remain high now that the election is over and the uncertainty has dissipated. Once this fear indicator drops, stock markets are historically expected to rise. And since shares of AI-related companies account for nearly half of the major stock indices, they will drive this growth, the strategist expects.

The risks to the technology sector posed by a potential Democratic victory were discussed even before the election. Ben McMillan, Chief Investment Officer at IDX Advisors, warned that opposition to the construction of data centers is becoming a central issue for the Democrats and poses a real threat to AI-related stocks. Analysts at Evercore ISI, however, pointed out that even with Democratic control of Congress, a rapid tightening of AI regulations at the federal level is unlikely as long as Donald Trump remains president. They attached particular importance to the gubernatorial election in Texas, where Abbott had previously imposed a temporary moratorium on the approval of new data centers.

BlackRock CEO Larry Fink warned that halting the construction of data centers in the U.S. could lead to a recession, since a significant portion of the country's economy already depends on these capital investments.

This article was AI-translated and verified by a human editor