Stock markets gained on Wednesday, reversing early losses, as it became clear that Democrats were set to seize control of Congress in a resounding midterm election victory that defied the party’s most optimistic expectations.
S&P 500 futures rose nearly 1 percent and European stocks gained even more in early trading on Wednesday.
When early results pointed to a landslide victory for the Democrats, Asian stocks tumbled on concerns that greater scrutiny of the data center boom could derail a prolonged rally in the region’s technology stocks. But in other areas, analysts said that Washington faces political gridlock, which has unclear implications for government spending and foreign policy but has tended to accompany market rallies after past elections.
“The U.S. midterms are a political tornado,” said Mike Bell, the head of strategy at RBC BlueBay Asset Management. “But for all the political whirlwinds that the vote is likely to stir, the markets are less likely to be blown around by this result.”
An index measuring the value of the U.S. dollar fell, while yields on U.S. Treasuries also declined, pushing government borrowing costs down, as analysts said that a political impasse in Washington could leave less scope for fiscal spending. The yield on 10-year Treasury notes dipped to 4.91 percent.
Generally, divided government is set to limit the prospects for major changes to the economic outlook, according to fund managers at Allianz Global Investors. “A Democratic sweep ultimately brings greater political tension than fundamental policy change,” they wrote in a research note.
At the same time, several analysts said the election result could increase President Trump’s focus on foreign policy, specifically the war in Iran.
“The consensus is still worried that oil prices could go higher if Trump steps up the pressure on Iran,” said Jane Foley, the head of foreign-exchange strategy, at Rabobank. “In fact, despite the historic moments that the elections have provided, the market’s main source of focus could remain squarely on Iran for now.”
Oil prices bounced between gains and losses on Wednesday, with the global benchmark for crude trading around $102 a barrel.
In recent days, polls had favored a Democratic victory in the House, though the Senate remained a closer contest. But as the results pointed to a huge win for Democrats in the House and Senate, traders considered how the shift in Washington might affect U.S. policy toward artificial intelligence and the vast sums being poured into data centers.
Trading was volatile in Asia. Japan’s Topix index dropped nearly 1 percent after hitting its lowest intraday level in months. But South Korea’s KOSPI index reversed early losses to finish up 0.6 percent.
While investors fear that greater Democratic oversight could slow data-center investment, Alicia Garcia-Herrero, chief economist for the Asia-Pacific region at the investment bank Natixis, said that she did not expect the party to “kill the goose that lays the golden eggs.”
The midterm results came at a fragile moment for technology stocks. Recent earnings reports that revealed accelerating spending plans have dented the shares of many U.S. tech giants, underscoring growing concerns about aggressive A.I. investment.
On Wednesday, there were signs of anxiety among investors in some companies at the forefront of the A.I. build-out. Shares of Taiwan Semiconductor Manufacturing Company fell 1.5 percent and Japan’s SoftBank Group, a major technology investor, fell 3.2 percent. Tesla and SpaceX, the Texas-based companies run by Elon Musk, who spent nearly half a billion dollars supporting Republican candidates, both dropped sharply in premarket trading.
The broader stock market, however, began to track the typical pattern of rallying under a divided Congress, because a split government can function as a check on sweeping policy changes.
According to the Franklin Templeton Institute, the S&P 500 averaged a 14.9 percent gain over the 12 months after the 10 midterm elections under Republican presidents since 1954, with similar market moves regardless of whether Republicans or Democrats take control of Congress.
But with U.S. borrowing costs already at their highest levels in decades, some analysts have warned that conventional wisdom might not hold for long.
“Shutdowns, debt-ceiling brinkmanship and budget gridlock under a Democratic Congress are greater risks,” strategists at the research arm of Amundi Investment Solutions wrote in a pre-election report. “In prior cycles, gridlock was a relief trade. At current yield levels, it may not be.”
River Akira Davis and Alexandra Stevenson contributed reporting.
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