Democratic wave sweeps Congress, why is Wall Street going long?

The results of the US midterm elections sent shockwaves through Washington, but failed to shake Wall Street. The Democratic Party secured a majority in both the House and Senate, and the governor's seat in Texas changed hands—marking the largest political reversal in a generation—yet the stock market responded by buying in.

Nasdaq 100 futures plunged as much as 2.4% on election night, but rebounded by 0.9% in the New York morning session, climbing approximately 929 points from the overnight lows. Both Goldman Sachs and Deutsche Bank released research reports suggesting that this rally has a solid foundation. The core logic: a large number of hedge positions accumulated before the election were closed en masse after the event, creating a passive upward push.

The structural impact of this election outcome on the markets remains significant. Gina Hinojosa, the new governor-elect of Texas, has clearly stated that she will not lift the moratorium on data center construction permits until a more comprehensive regulatory framework is enacted, directly impacting AI infrastructure investment expectations. Meanwhile, the debt ceiling will be reached in the second quarter of next year. Whether the Republican Party can independently raise the limit before the new Congress takes office has become the biggest source of uncertainty for the markets.

The Democrats originally needed a net gain of four Senate seats, but ended up taking seven, winning in Iowa, Kansas, Maine, North Carolina, Ohio, South Carolina, and Texas. According to Decision Desk HQ, Democrats now hold a 54 to 44 seat advantage over Republicans.

Key race outcomes were as follows: James Talarico defeated Ken Paxton in Texas, becoming the first Democratic Senator from the state since 1988; Adam Hamilton ousted incumbent Roger Marshall in Kansas, making him the first Democrat to represent the state in the Senate since 1932; Troy Jackson ended Susan Collins' nearly 30-year political career; Sherrod Brown beat Jon Husted in Ohio to stage a successful comeback; Roy Cooper won the Senate seat in North Carolina; and Annie Andrews beat Darline Graham in South Carolina.

In addition, Michigan progressive candidate Abdul El-Sayed defeated former Representative Mike Rogers by 52.2% to 45.8%, becoming the first Muslim ever elected to the US Senate. Congressman Ro Khanna commented that El-Sayed's victory "shows that progressives can win nationally."

In the House, NBC expects Democrats to win about 258 seats, a number not seen since Clinton took office in 1993, even after the Republican Party spent a year and a half redrawing districts.

The most market-sensitive result on election night was in Texas. State Representative Gina Hinojosa defeated Greg Abbott with about 53% of the vote, becoming the first Latina governor of Texas and the first Democratic governor since Ann Richards—even though Abbott invested nearly $180 million in his campaign since last year and Elon Musk contributed tens of millions of dollars supporting Republican candidates.

According to a post-election report by Goldman Sachs co-head of FX research Mike Cahill, Abbott had already imposed a freeze on new data center construction permits, and the market expected the moratorium to be lifted by year-end, allowing the backlog of applications to gradually clear. However, Hinojosa clearly stated that she will not lift the moratorium until more comprehensive regulations are enacted, "a process that could take longer and may delay the expected 2027 operational launch of several gigawatts (GW) of capacity to 2028."

The market responded immediately. Data center operators IREN, Hut 8, and Applied Digital all fell pre-market, while hyperscale cloud computing firms saw a rebound. Goldman Sachs Head of Equity Sales Rich Privorotsky explained this divergence: if supply of computing infrastructure is limited, chip, cooling, and data center hardware suppliers face the risk of customer overordering; but for capacity that is already deployed and powered on, scarcity will drive prices higher, benefitting existing hyperscale cloud providers. He concluded:

"Owning computing power that is online today is better than holding promises of tomorrow's capacity."

The market movement on election night was dramatic. As Democratic dominance became apparent, Nasdaq 100 futures fell 2.4%, S&P 500 futures dropped 1.4%, and Korea's KOSPI fell over 4%. UBS real-time commentary pointed to rising concerns about more friction over AI and data center investment, and a stalemate in debt ceiling negotiations as the main sources of pressure.

However, the sell-off quickly halted. When London markets opened, Nasdaq futures had regained most of their losses. The 10-year US Treasury yield fell by as much as 7 basis points to around 4.89% intra-session, before climbing back to about 4.93%, nearly unchanged on the day.

The US Dollar Index (DXY) weakened, with USD/JPY dropping from above 158.70 to below 157.50. According to a Goldman Sachs Asia sales team report, macro hedge funds and CTAs (Commodity Trading Advisors) mainly led this clear dollar shorting trend. Gold rose 2.3% to $4,020, while bitcoin rebounded to its prior high.

By the New York morning session, S&P 500 futures were up about 1%, Nasdaq futures up 0.9%, and Dow futures up about 700 points. AMD's earnings beat (up about 6% pre-market) also provided extra support for tech stocks.

Privorotsky attributed the reversal mainly to positioning: "A large number of hedges have been built up over the past few days and now need to be unwound. Valuations in the AI infrastructure sector have compressed significantly—the real question is how much of the bad news has already been priced in." He added, "My gut feeling is that AI infrastructure has been oversold... Volatility may drop sharply and spot prices could surge in the short term."

Deutsche Bank's Head of FX Research, George Saravelos, agreed with the market rebound and outlined three logical supports in his post-election report.

First, risks are skewed positively. Democrats' comfortable majority in Congress, together with Trump’s expressed willingness to cooperate with the opposition, should help suppress extreme policy outcomes and compress risk premia. Saravelos believes the market will increasingly interpret surprising shifts in executive policy as temporary, limited by the next presidential election or the new domestic political landscape.

Second, Iran risk premium has downside potential. Trump said in the past 48 hours that he would not take immediate military action against Iran and acknowledged that the Iran war situation influenced the election outcome. Saravelos noted that Middle East oil shipping has materially recovered, and current oil prices have already priced in a substantial risk premium for further escalation. "The longer escalation is postponed, the more downside pressure there is on oil prices."

Third, the debt ceiling and AI have become the most crucial variables. Saravelos highlighted the biggest policy uncertainty in the US: the debt ceiling is expected to become binding in Q2 next year. Reports indicate that Republicans plan to use the budget reconciliation process to raise the ceiling in the coming weeks. If successful, this would remove a major fiscal policy uncertainty and prevent AI and other policy issues from being dragged into lengthy negotiations with the Democratic Congress.

Saravelos' overall view on the dollar: declining energy and policy risk premia with rising uncertainty around AI implementation together will "generally pressure the dollar lower," supporting a continued bottoming in EUR/USD. He also warned that if the lame-duck Congress fails to raise the debt ceiling by January, it will be an "additional negative driver for the dollar."

From a medium-term market perspective, history is on the bulls’ side. Privorotsky noted that over the 12 months following the last 19 midterm elections since 1950, the S&P 500 has always risen. He also believes Trump's status as president until 2028 will prompt corporate management teams to execute capital expenditures, permit applications, and mergers and acquisitions ahead of 2027 to lock in the current policy environment.

But unresolved risks remain: the Texas data center freeze could delay several gigawatts of capacity until 2028, the debt ceiling will become binding in Q2 next year, Iran remains highly sensitive, and Trump has already publicly flashed a veto—just about an hour after promising to work with Democrats, he showcased a hat emblazoned with "veto" on social media.

The Republican Party has about eight weeks of unified governance, during which it can independently raise the debt ceiling before the new Congress is seated. If this window is missed, the opening act for the new Congress will be the debt ceiling showdown between House Majority Leader Hakeem Jeffries and Oversight Committee chair nominee Robert Garcia, who has publicly urged the White House to "get good lawyers."

The current rally was fueled by the passive unwinding of pre-election hedges. The truly critical issues—permits, power, and the debt ceiling—will not be addressed until Congress reconvenes in January.