Data centers, Fed policy, U.S. debt: Three areas to follow after the midterms

The Democratic Party’s victory in the midterm elections brought markets an initial wave of relief as stock indexes soared and the VIX, the Chicago Board Options Exchange’s volatility index, reflecting investor anxiety and expectations of sharp market swings, posted its biggest drop since April 2025. But Democratic control of Congress is shifting Washington’s priorities and will have a lasting impact on the economy, MarketWatch warns. It identified three key areas for investors to watch.

Voter opposition to new data center construction played a significant role in the elections, MarketWatch writes. With Democrats victorious, markets now expect AI infrastructure development to slow. “All else equal, this new environment should increase the cost of compute and is positive for the current owners of data-center capacity,” said Warren Pies, founder of 3Fourteen Research.

That benefits leading hyperscalers such as Alphabet, Microsoft, Meta, and Amazon: a shortage of computing power needed to train and run AI models will allow them to boost revenue from their cloud services. Shares of all four tech giants rose on Wednesday.

Meanwhile, shares of semiconductor companies, including Nvidia and Micron, as well as cloud platforms such as CoreWeave, came under pressure: a slowdown in capacity expansion could put their 2027 revenue targets at risk. “Our modeling suggests that even a modest slowdown in data-center pacing will cause semi revenues to undershoot the estimates,” Pies added.

U.S. Treasury yields fell on Wednesday as the bond market reacted to both the election results and Treasury Secretary Scott Bessent’s plans to reduce issuance of longer-dated securities, MarketWatch writes.

Market expectations for a Fed rate hike in December strengthened: CME FedWatch currently puts the probability at 80%. However, expectations for further tightening in 2027 have weakened, Reuters notes.

The Democratic victory could also shape the Fed’s future leadership. Rabobank strategists cited by MarketWatch expect the incoming Senate to block Trump from installing loyalists on the Fed’s Board of Governors should vacancies arise. Only one governor’s term is scheduled to expire in the next two years, that of former Fed Chair Jerome Powell, JPMorgan Chief Economist Michael Feroli points out.

The return to divided government means political gridlock will again become the norm in Washington, MarketWatch writes. UBS analyst Jonathan Pringle expects tensions to rise ahead of December 11, the deadline for passing a new spending package. A debate over the debt ceiling is also expected in the second half of next year.

One thing will remain unchanged: the budget deficit. Pringle expects it to stay at around 6.5% of GDP as Democrats seek to delay or soften cuts to food assistance and healthcare subsidies enacted under Trump’s 2025 budget law. He expects the waning fiscal boost to GDP growth to have a greater impact in 2028 than in 2027.

The period following midterm elections has historically been one of the strongest for U.S. stocks, MarketWatch writes. Tom Essaye, founder of Sevens Report Research, cites the following figures: since 1950, November has been the S&P 500’s second-best-performing month in midterm election years, with an average gain of 2.7% and positive returns 79% of the time.

The following three quarters – the fourth quarter of the election year and the first and second quarters of the following year – have historically delivered the strongest returns of the entire election cycle. From 1930 to 2026, the S&P 500 never fell over the 12 months following a midterm election, gaining an average of 14%, well above its historical average annual return of 10.5%.