Washington shifted decisively. A sound investment plan does not need to.
In the Nov. 3 midterm elections, Democrats won majorities in both the House and Senate, a larger shift than most expected. The market reaction has been volatile rather than uniformly positive. Stock futures fell sharply on election night, then the S&P 500 gained about 1.6% the next day. By Thursday, technology was lagging again. Beneath the surface, dispersion was unusual: on Wednesday, 50 stocks in the S&P 1500 fell more than 10% while 44 rose more than 10%.
The election did not change whether investors should own stocks. It changed which risks the market is assigning to different parts of the economy. Here is what we are watching.
Gridlock limits legislation, not political volatility
Democrats lack the 60 Senate votes generally needed to overcome a filibuster, and the votes to override a veto. Sweeping changes to tax, trade or technology policy remain difficult, and any reversal of last year’s spending cuts is likely to come at the margins. But less legislative risk is not the same as calm. Government funding, the 2027 debt ceiling, tariffs, the Iran conflict, health care spending and congressional investigations could all produce market moving headlines.
History argues against trading the election
Since 1950, the S&P 500 has been higher one year after every midterm election, with an average gain of about 15.5%. Nineteen elections is a small sample, and history is not a forecast. Still, it is a strong reason not to abandon a plan because a result feels surprising.
The most immediate policy risk may involve data centers
Sweeping federal AI legislation is unlikely. The more consequential changes may come from the states. Several newly elected governors campaigned for tighter rules on data center power, water, tax incentives and permitting. By some estimates, the states that could act represent roughly 45% of planned U.S. data center capacity, with Texas alone about a quarter.
That does not mean the AI investment cycle is ending. Projects could be delayed, made more expensive or moved to other power rich states, changing where, when and at what cost capacity gets built. The effects will be uneven. Companies that depend on ever faster construction could face pressure, while established cloud platforms may benefit if scarcer capacity supports pricing. Markets are already drawing that line, with chip, memory and data center construction stocks under pressure.
The underlying economy remains resilient
Productivity grew at a 3.6% annualized rate in the third quarter, above expectations, while unit labor costs fell at a 0.7% rate and initial unemployment claims dropped to 189,000. That combination is another reason not to turn the election into a defensive portfolio call.
Inflation risk has shifted rather than disappeared, however. Costs outside of labor, including energy, tariffs and AI related inputs, are still rising, and the ISM services prices index reached 73.0 in October, among its highest readings since 2022.
What this means for portfolios
We would not make major allocation changes simply because control of Congress changed. Instead, the election reinforces principles that already matter.
- Stay diversified beyond technology. Staples, health care, financials and materials have led the post election rotation while technology lags.
- Separate AI demand from construction capacity. Cloud platforms, chip suppliers, power providers, engineering firms and independent cloud providers that rely on borrowing will not respond to building limits the same way.
- Keep bonds in the conversation. With 10 year yields near 4.9%, bonds can offer meaningful income, but rising nonlabor costs argue against assuming inflation is solved.
- Focus on fundamentals. Profits, balance sheets and the policies actually enacted will matter long after the election headlines fade.
The bottom line
The election has changed the distribution of risks, not the principles of sound investing. The clearest new risk is state limits on data centers; a clear positive is strong productivity with moderating labor costs. Rather than trading the election, we believe investors should stay diversified, evaluate AI exposure company by company, and keep meaningful fixed income in the mix.