Key Questions: The Midterms Are Over. Should You Sell Your Stocks?

No. The midterm results alter some policy risks and they reinforce the case for diversifying away from AI concentration, but they don’t justify changing your strategic allocation.

What the Election Results Mean for Markets

The results of the 2026 congressional midterms are not yet final, but the outcomes are clear: Democrats resoundingly regained control of both chambers in Congress, and they secured several key state governorships as well. The margin of victory was so decisive that it is unlikely that results will be contested, reducing an element of uncertainty

As a result, markets have now turned their focus toward evaluating policy initiatives the Democrats may pursue at the federal, state, and local levels. Notably, through the “power of the pen,” the president still retains veto authority. That’s in addition to the ability to institute certain policies of his own through the use of executive orders, which has risen appreciably in the last several years.¹

AI Infrastructure Takes Center Stage

Market participants will likely focus most closely on state and local policy debates over data centers and AI-related infrastructure, an issue that grew in importance in the weeks leading up to the midterms. Candidates on both sides were compelled to enunciate their views as skeptical voters brought the issue to the fore, and this is the most proximate cause for the recent stock market sell-off.

More specifically, roughly 50 ballot measures imposing temporary, conditional, and outright restrictions on data centers were voted on this week, and it appears that nearly all of them passed by a clear majority. This has fueled concerns that the torrid spending boom related to artificial intelligence may abruptly slow.

Such initiatives should have little bearing on projects planned for 2027 and possibly 2028. However, reduced tax incentives, stricter power and water requirements, and increased financial commitments to constituents could substantially raise costs for data center projects currently underway. And should a slower, more expensive buildout result, some companies may be financially challenged at a time when borrowing costs are already elevated, and the economy as a whole could face downward pressure on growth, employment/wages, and inflation.

That said, there is a great deal of nuance involved with state regulations. Data center companies themselves could elect to pursue projects in “more AI-friendly” states (and possibly even in space!). Moreover, despite the growing AI backlash, we don’t believe sweeping anti-AI policies that ban development at the federal level will become law, for any attempt would likely face a presidential veto.

Why Diversification Still Matters

Nevertheless, we continue to believe that investors need to carefully assess their portfolios, and as we have stated previously, the ultimate beneficiaries of artificial intelligence, in our view, will be the adopters, not a small cohort of enablers. As AI has attracted greater investor interest, companies directly and indirectly levered to AI have grown in size within various commonly used market benchmarks and many related benchmark-linked investments. We feel strongly that investors should be considering less concentrated/more diversifying strategies.

As far back as 13 months ago, we also expressed the view that the AI trade had entered a riskier phase, a reference to the fact that many of the AI enablers became reliant on financing sources beyond internally generated cash flows; some also engaged in various forms of circular/vendor financing. This was not a suggestion that the AI trade was on the verge of an imminent collapse. But we did believe that investors would need to become more discerning and selective and also migrate “up in quality” within their bond portfolios.

Keep the Long-Term View

In sum, in the near/medium-term, markets will focus on how policy changes might affect the future (and the economics) of artificial intelligence. The future of the Iran War, healthcare reform, and mounting government debt will also likely be in focus, particularly the federal debt ceiling, which will likely take center stage in the first half of 2027, if not before.

Long-term investors will be best served by focusing on things unaffected by elections: Fed policy, inflation, corporate profits, the health of credit markets, the labor market, consumer spending, and fiscal policy, and they should not alter their strategic asset allocation strategy based on this week’s results. Near-term volatility may persist as markets continue to assess future policy considerations, but we firmly believe that portfolio decisions should be anchored to a client’s overarching objectives, their liquidity needs, and their tolerance for risk.

For more information, please contact your advisor.