There are frequent warnings about the Republican Party's midterm elections, and the AI bull market ushered in a “vote stress test”: towards “bubble 2027” or collapse in valuations?
The Zhitong Finance App learned that according to the Reuters/Ipsos survey from August 28 to 31, 47% of registered US voters listed the cost of living as the most important factor in deciding voting in the midterm elections, and 71% of American adults disapproved of Trump's way of dealing with the cost of living; in the same survey, only 33% of respondents acknowledged its overall governance performance due to high energy costs and a resurgence in inflation. These are preliminary poll results conducted by the media. They cannot be directly converted into congressional seats or election win rates, but they largely indicate that energy, electricity prices, and consumer consumption burdens have become policy backgrounds that must be paid attention to.
The influence of congressional control, that is, control of the US Senate and House of Representatives on financial markets is first reflected in legislation, government support and funding for large-scale investment projects, investigations, and personnel appointments. In particular, the Republican Party's holding on to the Senate and Abbott's victory in the Texas gubernatorial election are critical to the investment prospects of the global AI computing power industry chain and the valuation trajectory of core computing power targets.
However, there will be no presidential election in the midterm elections; even if the control of the National Assembly changes, major tax law adjustments will still have to go through the legislative process, and the president reserves the right to veto. Overcoming the usual presidential veto requires two thirds of the votes of both houses. Therefore, a “change in congressional control” cannot be directly equated to an immediate reversal of Trump's pro-business tax reduction policy, a complete tightening of supervision, or a trillion-dollar AI data center investment process across the US that is in full swing stopped due to pressure from political parties.
The construction constraints faced by data centers have already been specified. Texas Governor Abbott requested on August 3 that a comprehensive review be carried out on data centers promoted through the Texas power grid operator's grid-connection procedures, and that the project must not continue until the review is completed. The state government revealed at the time that the grid connection application involved more than 474 gigawatts of additional electricity demand, about 90% coming from data centers; these were the scale of the applications, not production loads or confirmed orders. The review covered electricity, water, financial concessions, and community impact, which is enough to show that the bipartisan cost of living dispute closely linked to the midterm elections can be transmitted to AI infrastructure investment through grid connection conditions and project timelines.
The research report published by a team led by Bank of America senior strategist Michael Hartnett (Michael Hartnett), who has the title of “Wall Street's Most Promising Strategist,” incorporates US policy conditions and capital costs into the AI computing power theme valuation analysis: if the Republican Party fails to win the Senate and successively loses the Senate and the House of Representatives, the extension of project approval will delay the launch of computing power and actual AI revenue generation and profit formation; the rise in financing interest rates brought about by the Democratic Party will increase the cost of data center construction and reduce the current value of long-term cash flow.
According to this valuation framework, global semiconductor, data center power chain equipment, and AI computing power leasing companies dominated by “new cloud” forces will inevitably be affected by negative expectations, and eventually pass verification of actual orders, deployment pace, capital expenditure, and free cash flow. This sell-off pressure may first be reflected in a contraction in the valuation of AI-related stocks; if approval and financing restrictions further cause cloud vendors to delay construction and equipment purchases, the impact will only be transmitted along the industry chain to supplier orders, revenue, and operators' cash flow, causing policy concerns to further evolve into profit pressure.
Hartnett set the Democratic Party's control of both houses of Congress as an important pressure scenario: market concerns about rising tax burdens, stricter regulations, and restrictions on AI construction are rising, putting pressure on corporate profit expectations and valuations at the same time; based on this, he proposed an asset price mix where US stocks may fall by more than 10%, the US dollar weakens, and bond yields fall. Relatively speaking, he sees the Republican Party controlling both houses as a scenario where risk appetite expands, and calls the Republican Party controls the Senate and the Democratic Party controls the House of Representatives as “impasse blond girls” who are moderately beneficial to risky assets.
The midterm elections are in their final sprint, and there are frequent alarms from the Trump-led Republican Party
With Labor Day coming on Monday, the final sprint phase of the election campaign unofficially kicked off. With only two months left until November's midterm elections, President Donald Trump's extremely low level of popular support is jeopardizing the Republican Party's chances of maintaining a weak majority in Congress.
Election experts said that the midterm elections were first a referendum on those in charge of the White House. This is particularly evident in the Trump era: he has been a dominant figure in American politics for almost a decade, and he may face strong political resistance during his last two years in office.
If the Democratic Party wins a majority in the US House of Representatives — which now seems likely to happen — the party could launch an investigation into the Trump administration that could cause significant political damage while forcing the White House to compromise on most legislative issues. Democratic Party leaders have vowed to investigate what they claim is Trump's corruption and irregularities.
Analysts said that the dispute over control of the US Senate is still too tight to determine the outcome; however, if the Democratic Party gets a majority of seats in the Senate, it can block many of Trump's personnel nominations, including the Chief Justice candidate proposed when there is a vacancy in the Supreme Court.
Despite the Democratic Party's own challenges, including ideological differences between the center and the left, Trump's unpopularity has become a political burden for the Republican Party.
According to the latest Reuters/Ipsos survey, Trump's approval rating is at an all-time low, and the vast majority of respondents are unhappy with Iran's war and economic conditions. The difference between his disapproval rating and approval rating was almost double that of the same period in 2018; that year, the Democratic Party added 40 seats in the House of Representatives.
Democratic voters expressed higher voting enthusiasm than Republican voters, and recent active voting by Democratic voters in the special elections and primary elections also confirmed this finding. Registered voters' support for Democratic candidates is 5 percentage points higher than Republican candidates.
The laws of history are also beneficial to the Democratic Party. Since 1938, with the exception of two midterm elections, the current president's political party has lost seats in the House of Representatives in every remaining midterm election.
“I think people generally feel that the president is not focusing on what voters are most concerned about, which is whether living expenses are affordable,” said Jessica Taylor, a Senate election analyst at the “Cook Political Report.” “If you want to express your dissatisfaction with the president, the only thing you can do during the midterm elections is to vote against his political party.”
However, the Democratic Party is also facing its own challenges. In a series of competition within the Democratic Party, progressive candidates who actively challenged the establishment factions, including the Democratic Socialists, unexpectedly defeated the moderates who received support from the establishment factions, raising questions about the party's leadership and campaign messaging and internal unity.
The Republican Party still has several structural advantages. Currently, the Republican Party maintains a slight lead over 214 seats with 218 seats in the House of Representatives. After winning an unprecedented constituency reclassification battle that occurred in the middle of a ten-year cycle, the party may have added a net additional 10 seats based on the rezoned constituency alone.
All 435 seats in the House of Representatives, and about one-third of the 100 seats in the Senate, will be re-elected in the November 3 election.
At the same time, the Senate election layout is even worse for the Democratic Party. Even if the Democrats win in the tough competition of Georgia, Maine, Michigan, and North Carolina, they still need to win at least two of the other four states: Alaska, Iowa, Ohio, and Texas. Trump won all four states by double digit percentage points in 2024.
Although from a national perspective, Democratic candidates raised more money than their Republican rivals, the Republican Party Committee and the Super Political Action Committee supporting the Republican Party far surpassed that of the Democratic Party's counterpart. Trump's own super political action committee holds $400 million in campaign funding.
“There is no doubt that the Democratic Party will win the national vote,” Democratic strategist Jesse Ferguson said. “The question is whether these structural barriers will prevent them from winning a majority in the Senate or the House of Representatives.”
Under Trump, the Republican Party has been trying to portray the Democratic Party as a socialist or even a communist, using candidates such as Michigan's Progressive Democratic Senator nominee Abdul El Said, for example.
“This year is a year of 'showing comparisons to America',” said House Speaker Mike Johnson. This echoes the “Compact with America” campaign platform proposed by the Republican Party in the 1994 midterm elections. “It's a contrast between common sense and insanity.”
In a context where people are generally dissatisfied with the burden of living costs, it is unclear whether these attacks will work. In particular, some states that have received much attention for the Senate election may be being particularly affected by some of Trump's policies.
In Iowa, farmers are being hit by rising energy costs and Trump's tariff policies; Texas cattle farmers are outraged by his decision to lift taxes on foreign beef imports. Michigan and Maine may be affected by the escalating trade war between Trump and neighboring Canada and China, the largest trading country.
The Republican Party will hold an unusual midterm election conference this week. Party officials hope that the campaign will revive the enthusiasm of the basic market while reminding voters of Trump's tax cuts and other political achievements. However, the conference will focus on Trump, who will deliver speeches in both evening sessions; this may also be counterproductive by closely tying the weak Republican candidate with the president.
While the cost of living burden and war are top topics, many campaigns will also focus on health care, Israel's war in Gaza, and critical community disputes over the extreme power and water consumption resources of data centers.
There are still eight weeks until election day. This is a long time, given Trump's unique ability to change the focus of political discussions almost every day. However, analysts said that if the Republican Party wants to change voters' negative views on the economy, it may be too late.
“Can the Republicans further boost voters' enthusiasm?” Kyle Condick, an election expert at the University of Virginia Center for Political Studies, asked. “Another possibility is that support will not pick up, and the decline in Trump's approval rating will be irreversible. For me, this is the biggest question about this election.”
Bank of America's Mid-Term Election Trading Framework: Policy Scenario Influences Valuation and Sentiment, and Realizes Cash Flow and Revenue Generation to Test the Return on AI Investment
The Bank of America strategist team led by Hartnett's August 14 research report linked “the Republican Party holding the Senate and Abbott holding the position of Texas governor” to its so-called “bubble 2027,” and put the opposite combination under pressure that US stocks may fall by more than 10%. Bank of America said at the time, “If Trump can hold the Senate and Abbott can hold Texas, then it is expected that the stock market — especially AI-related semiconductor stocks — will soar all the way up and push the market towards 2027, which may be full of bubbles (Hartnett quoted “bubbly 2027”).” However, if the Democratic Party takes the Senate and defeats Abbott at the same time, then US stocks will face a “sharp drop” of at least 10%. At the same time, the US dollar and bond yields will also fall sharply before the end of the year.
The midterm elections are more like a “valuation and risk premium switch” for the global semiconductor super-bull market than the engine that determines AI demand itself. Therefore, according to the Bank of America strategist team, elections can change policy expectations and valuations, while token orders and own cash flow are used to test the actual return on investment in computing power resources and the sustainability of AI capital expenditure in the global AI sector.
Hartnett and his team's strategy and investment logic are very clear: if the Republican Party holds the Senate and Greg Abbott holds Texas, the market will interpret it as continuing to favor the AI data center, energy infrastructure, tax and commercial regulatory environment. Especially when Texas already has 335 data centers and 247 planned projects, this is equivalent to reducing the market's risk of “electricity prices, grid pressure, and voter backlash ultimately forcing AI CapEx (AI capital expenditure) to be politically constrained.”
The Bank of America's research report on Friday listed three congressional control combinations: he described the Democratic Party's control of both houses as putting pressure on risky assets, falling yields on the US dollar and bonds, the Republican Party's control of both houses as expanding risk appetite, and describing the Republican Party's control of the Senate and the Democratic Party's control of the House of Representatives as a “deadlocked blond girl” scenario that moderately favors risky assets.
The Bank of America said that if the Democratic Party sweeps both houses in the midterm elections, US stocks will face a decline of more than 10%, the US dollar weakens, bond yields decline, and the AI bubble will face the risk of bursting. Bank of America strategists led by Hartnett characterize “Democrats sweeping Congress” as one of the biggest tail risks in the current market, and investors are currently putting almost no price on it. Conversely, if the Republican Party unexpectedly holds both houses, it means that overall risk appetite will pick up, the AI bubble will receive a green light, and the exceptionalist narrative of the dollar and the US market will be rekindled. Currently, the “Republican Party controls the Senate, Democratic Party controls the House of Representatives” pattern, which seems to have the highest probability of victory, corresponds to the mildest and most market-friendly risk appetite — “stalemate is a girl with blond hair.”
Bank of America quoted a recent fund manager survey conducted by the agency as showing that 47% of respondents expected the results to be “the Republican Party controls the Senate and the Democratic Party controls the House of Representatives,” 23% expected the Democratic Party to sweep, and only 9% expected the Republican Party to maintain control of both houses. Currently, the Republican Party leads 53-47 in the Senate and 218-212 in the House of Representatives.