Stocks soar as Wall Street reacts to Democrats taking control of Congress

US stocks have soared as Wall Street digested the resounding Democrat sweep in the midterm elections and mulled what a divided government will mean for US President Donald Trump’s policy agenda as well as the AI trade.

The Dow surged 1240 points, or 2.4 per cent, on Wednesday (Thursday morning AEDT) and was set for its best day since April. The S&P 500 and tech-heavy Nasdaq Composite each gained 1.4 per cent.

Stock futures reversed initial losses and turned higher overnight after the election, as investors embraced the certainty offered by the decisive results. Investors also warmed to the prospect of policy gridlock under a divided government, which can curb excess spending and create a more predictable outlook for markets. The VIX, which measures expectations for volatility, sank 16 per cent.

“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 outcome could keep a lid on excessive government borrowing and spending bolstered US government bonds, sending yields lower. The dollar weakened against a basket of major currencies.

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“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.”

It “would significantly constrain Trump’s legislative agenda, particularly on taxes, fiscal stimulus and spending”, said Charu Chanana, chief investment strategist at trading platform Saxo, in a note on Wednesday (Thursday AEDT). “But Democrats would not have a free hand to rewrite policy either, because Trump retains veto power.”

Future of data centres unclear

Meanwhile, investors are also trying to discern what key election results could mean for the outlook for data centres, 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 per cent for most of the year.

The proliferation of AI data centres 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 centre buildout.

While most stocks were higher on Wednesday, shares of semiconductor chipmakers and other companies involved in the data centre buildout fell. Nvidia (NVDA) fell 2 per cent, while an exchange-traded fund tracking AI infrastructure stocks dropped 10 per cent.

“While a blue wave could spark volatility in certain sectors, such as tech and AI, given growing public opposition to the buildout of data centres, 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.

Shares of Elon Musk’s Tesla (TSLA) and SpaceX (SPCX) each fell about 4 per cent. 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.

Elsewhere, shares of CVS Health (CVS) dropped 12 per cent after the healthcare giant announced it would split into two companies.