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Democrats’ takeover of Congress has triggered a sharp rally on Wall Street, but AI infrastructure, chipmakers and defence stocks have come under pressure. Here is what drove the market reaction and what investors should watch next
Wall Street staged a sharp rally after Democrats won control of both chambers of the US Congress in the midterm elections. But the gains were far from uniform. While shares of technology giants such as Microsoft, Amazon and Alphabet climbed, data centre operators, chipmakers and defence companies came under pressure as investors reassessed what the political shift could mean for corporate spending, regulation and government policy.
The S&P 500 rose 1.6 per cent to close at 7,688.62 on Wednesday marking its biggest daily gain in nearly three months. The Dow Jones Industrial Average jumped 1,569 points, or 3 per cent, to 53,356.12, while the Nasdaq Composite gained 1.4 per cent to 25,736.51.
The rally came as investors welcomed a clear election outcome and the prospect of a divided government in Washington. Democrats have won control of the Senate and House of Representatives, while President Donald Trump remains in the White House. This could make it harder for the administration to push through major legislative changes without facing resistance from Congress.
Why did Wall Street rally after the election?
The immediate trigger was a reduction in political uncertainty. Investors had been weighing the possibility of a prolonged election dispute, changes in government policy and tighter scrutiny of businesses that have benefited from Trump’s economic agenda.
More from BusinessWith Democrats taking control of Congress, investors are now expecting greater political scrutiny and a legislative deadlock on several issues. Historically, markets have often responded positively to divided government because it can limit sudden changes in taxes, spending and regulation.
The election result also appeared to ease fears of a prolonged political confrontation. Trump accepted the results, helping markets recover from their initial losses as the outcome became clear.
A fall in oil prices provided another boost. Investors bet that the Democratic victory could increase pressure on Trump to find a way to end the US-Israeli war on Iran. Lower crude prices can ease inflationary pressure, reducing concerns about higher interest rates and improving the outlook for businesses and consumers.
Why did Microsoft and Amazon rise while data centre stocks fell?
One of the biggest surprises was the sharp divergence between established technology companies and businesses involved in building new AI infrastructure.
Microsoft shares gained 6.7 per cent on Wednesday, while Amazon rose 6.1 per cent. Alphabet, Google’s parent company, climbed 3.2 per cent and Meta Platforms added 1.4 per cent.
Investors are betting that tighter restrictions on new data centre projects could work in favour of established technology companies. These companies already operate large cloud and data centre networks and have the financial resources to continue investing in artificial intelligence.
A slower expansion could also give them more room to manage their spending, repay debt and return cash to shareholders. It could make it harder for smaller competitors to enter the market and challenge their position.
The picture was very different for data centre operators. Hut 8 shares plunged 23 per cent, IREN lost 11 per cent, Core Scientific fell 10 per cent and Applied Digital declined 6.7 per cent.
These companies depend heavily on new projects, financing and approvals to expand their infrastructure. Any delay in data centre construction could affect their growth plans and ability to generate revenue.
The political shift has added to concerns that local opposition to data centres could translate into stricter rules. The issue has gained prominence in states such as Texas and Georgia, where residents have raised concerns about the large amounts of electricity and water required by these facilities.
In Texas, Democratic governor-elect Gina Hinojosa has called for a moratorium on new data centre approvals until state lawmakers introduce safeguards. This could put projects awaiting permits under pressure, even as demand for AI computing continues to grow.
Chipmakers were also caught in the sell-off. The Philadelphia Semiconductor index fell 3.1 per cent, hitting a six-month low. Nvidia shares dropped 3.2 per cent, although AMD gained 1 per cent after forecasting stronger-than-expected growth in 2027.
Why did oil and defence stocks decline?
The fall in crude prices was another major factor behind Wednesday’s market moves. Brent crude dropped 8.7 per cent to settle at $94.62 a barrel, its lowest level in two months.
Investors are betting that Democrats controlling Congress could make it more difficult for Trump to continue the Iran war without facing political resistance. Lower oil prices could also ease pressure on inflation, which has been a concern for financial markets.
The fall in crude weighed on energy companies. The S&P 500 energy sector dropped 4.8 per cent, even as most other sectors advanced. Solar and clean energy companies moved in the opposite direction. Investors expect Democratic lawmakers to maintain support for renewable energy development. The Invesco Solar ETF climbed nearly 6 per cent.
Defence stocks also lost ground. Shares of Lockheed Martin, Northrop Grumman and RTX declined as investors considered whether Trump’s proposed $1.5 trillion defence budget could face greater resistance in a Democratic-controlled Congress.
Tesla and SpaceX, both closely associated with Elon Musk, also fell. Tesla declined 3.3 per cent and SpaceX lost 3.9 per cent. Musk had spent nearly half a billion dollars supporting Republican candidates, including efforts to retain Republican control in Texas, where both companies are based.
