AI stocks: Midterm elections could threaten AI trade as data center backlash grows

Public opposition to data centers is emerging as a potential risk to the artificial intelligence investment boom. The outcome of the November 3 US midterm elections is likely to influence the regulatory environment surrounding the industry's rapid expansion, Reuters reported.

Artificial intelligence has been a key driver of the US stock market's four-year bull run, as major technology companies, including Alphabet and Amazon, continue to commit billions of dollars to developing data centers and other AI infrastructure. Spending on AI infrastructure is expected to exceed $1 trillion next year, supporting corporate earnings and investor optimism about the technology's growth prospects, Reuters reported.

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However, growing resistance to data center construction is raising concerns about whether the pace of investment can be sustained. Communities across the United States are increasingly worried about the environmental impact of large facilities, rising electricity costs and the broader implications of AI adoption.

The issue has become increasingly relevant for financial markets, where investors have closely monitored capital expenditure plans by major technology companies as an indicator of the AI boom's strength. Recent concerns about debt levels in the cloud computing sector, particularly around CoreWeave, have already unsettled parts of the AI trade, highlighting the market's sensitivity to potential obstacles to expansion, Reuters reported.

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Democratic victory could increase regulatory scrutiny

A Democratic victory in both chambers of Congress would represent a significant political shift, transferring control of the House of Representatives and Senate from President Donald Trump's Republican Party. Such an outcome could increase scrutiny of AI companies and data center development, even if sweeping legislation to restrict construction remains unlikely.

Trading on prediction markets Kalshi and Polymarket has indicated that a Democratic sweep is the most likely outcome. Investors are therefore assessing how a change in congressional leadership could affect the industry's regulatory outlook, Reuters reported.

According to Reuters, analysts expect Democratic control of Congress to result in more hearings and investigations into AI development, data center construction and their broader economic and environmental consequences. Although such scrutiny may not directly halt investment, it could generate negative headlines and increase uncertainty for companies planning large infrastructure projects.

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Public opposition to data centers is not confined to Democratic voters. However, a Reuters/Ipsos poll released this month found that 69% of registered Democratic voters supported limits on data center construction, compared with 43% of Republican voters.

Despite the possibility of increased oversight, analysts remain sceptical that Congress would pass legislation capable of significantly slowing the industry's expansion. Trump has supported AI development and would likely oppose measures that substantially constrain investment, analysts said.

Trump also said on Wednesday that companies building data centers should provide a dividend to local communities to improve public acceptance of such projects.

Economic growth and competition with China could provide additional reasons for lawmakers from both parties to avoid measures that significantly impede the industry's development.

Nevertheless, greater congressional scrutiny could increase volatility in AI-related stocks as investors respond to investigations, regulatory proposals and uncertainty over future investment plans, Reuters reported.

State and local elections could have a direct impact

Beyond the congressional contest, investors are closely monitoring state and local elections, where authorities have considerable influence over data center development, electricity infrastructure and permitting decisions.

Several states, including Texas, Ohio, Pennsylvania, Georgia, Nevada, Wisconsin and Michigan, are drawing attention from investment strategists tracking gubernatorial and legislative races. Individual elections involving utility regulators could also influence the cost and pace of new projects.

According to Reuters, state and local governments can play a major role in shaping the restrictions and regulatory requirements data center operators face. Election outcomes could therefore directly affect companies seeking to expand their infrastructure footprint.

The geographic concentration of data center investment makes these contests particularly important for investors. Changes in local leadership or regulatory priorities could affect construction schedules, electricity expenses and the financial viability of proposed facilities.

AI investment outlook remains intact, but costs could rise

Market strategists broadly expect the AI investment theme to remain intact, given the technology's strategic importance and the scale of spending planned by major technology companies. However, political opposition could complicate the industry's expansion by increasing regulatory uncertainty, delaying projects and raising operating costs.

Kevin Shea, senior equity analyst at BNY Wealth, said policy uncertainty was unlikely to derail the broader AI investment theme but could disrupt the timing and cost of infrastructure development, Reuters reported.

For investors, the midterm elections introduce another variable into a market increasingly dependent on sustained AI spending. While a Democratic victory may not halt data center construction outright, greater oversight and tougher local regulations could challenge assumptions about the speed and profitability of the next phase of the AI boom.

The outcome could therefore influence not only technology stocks but also utilities, power infrastructure providers and other companies benefiting from the expansion of data centers across the United States.

(Disclaimer: This article is based on inputs from agencies. These do not represent the views of The Economic Times)