US stocks rallied on Wednesday as Investors also reacted positively to the potential for policy gridlock under a split government, which can limit excessive spending and foster a more predictable market environment. The VIX, a key gauge of market volatility expectations, plummeted nearly 20%.
“The combination of a large Democratic majority in Congress and President Trump’s statement that he is willing to work with the opposition should act as a break on extreme policy outcomes and bring down risk premia,” George Saravelos, global head of FX research at Deutsche Bank, said in a note.
Expectations that the election results might curb government borrowing and spending provided a boost to US government bonds, pushing yields lower. The dollar also saw a decline against a basket of major currencies.
“Divided government has generally made it harder for fiscal stimulus to be passed,” Deutsche Bank analysts wrote in a note. “So, that’s eased concerns on the fiscal trajectory a bit.”
“A Democratic-controlled Congress would significantly constrain Trump’s legislative agenda, particularly on taxes, fiscal stimulus and spending,” Charu Chanana, chief investment strategist at trading platform Saxo, said in a note on Wednesday. “But Democrats would not have a free hand to rewrite policy either, because Trump retains veto power.”
Meanwhile, investors are also trying to discern what key election results could mean for the outlook for data centers, which are the bedrock of the AI trade that has buoyed US markets.
Wall Street analysts had expected a strong performance for Democrats, but the extent of the sweep caught some traders off guard. On Kalshi, odds for Gina Hinojosa to win the Texas governor’s race were pinned at less than 20% for most of the year.
The proliferation of AI data centers across different states became a critical issue in many campaigns, and Democrat wins in states like Texas raise questions about whether there will be more moratoriums or restrictions that could slow the data center buildout.
While most stocks were higher Wednesday, shares of semiconductor chipmakers and other companies involved in the data center buildout fell. Nvidia (NVDA) fell 3%, while an exchange-traded fund tracking AI infrastructure stocks dropped 9%.
Shares of CoreWeave (CRWV) and Nebius (NBIS), two neoclouds that rent out compute power for the AI boom, sank roughly 10% and 6.7%, respectively.
Shares of Elon Musk’s Tesla (TSLA) and SpaceX (SPCX) fell about 3.3% and 3.9%, respectively. Musk has made Texas the home for his companies, and Democrats’ victories in the gubernatorial and Senate races are casting uncertainty over his future relationship with the state.
“While a blue wave could spark volatility in certain sectors, such as tech and AI, given growing public opposition to the buildout of data centers, we believe markets can grind higher regardless of the outcome as investors applaud falling uncertainty,” Justin Buell, chief investment officer at Continuity Group, wrote in a note.
Elsewhere, shares of CVS Health (CVS) dropped 12.5% after the healthcare giant announced it would split into two companies.
