The Overlooked Risk in AI Trading: U.S. Midterm Elections
Taylor Wilson
With U.S. midterm elections approaching, a Democratic House takeover would put data-center moratoriums and tighter China chip-export curbs squarely in play — a political risk the semiconductor sector, up 74% this year, has yet to fully price in.
Semiconductors rallied all year — where exactly is the risk?
The S&P 500 briefly topped 7,600 this week. The VanEck Semiconductor ETF (SMH) is up 74% year-to-date; Nvidia's market cap exceeds $5 trillion.
This means → nearly all of those gains are a bet on uninterrupted AI buildout. Any policy signal that slows the pace hits valuation foundations directly.
Raymond James policy analyst Ed Mills flags two Democratic priorities — a data-center moratorium and stricter China chip-export rules — that target the AI trade's core thesis.
Would a data-center moratorium actually pass?
Mills sees the moratorium as unlikely to become law, but warns that once it enters the policy spotlight, market cap tied to AI buildout and earnings reprices.
In plain terms = the bill doesn't need to pass. The mere expectation of "maybe a pause" is enough for capital to reassess AI-infrastructure stocks.
Morgan Stanley's Ariana Salvatore adds a finer distinction: a full Democratic sweep is the worst outcome for data centers. Republican control of both chambers — or a fragile Democratic majority — would be more favorable for permits and pricing power.
China chip exports — why might Democrats be tougher than Trump?
The Trump administration has been relatively open to Nvidia's H200 chip exports to China. Democrats lean toward a harder line on China trade.
This means → if Congress flips, Nvidia's current shipping window to China could narrow, directly pressuring earnings expectations behind its $5 trillion valuation.
TSMC is up 46% this year; AMD is up 144%. The entire AI chip supply chain is exposed to this single policy variable.
What does history say — how do stocks perform in midterm years?
Canaccord Genuity data show the S&P 500 falls an average of 3.87% in Q2–Q3 of midterm years; the Russell 2000 drops 9.12% (data back to 1982).
Natixis research finds that under divided government, the S&P 500 returns just 4.8% on average — far below the 10.9%–12% seen under unified party control.
In plain terms = history points one way: election years are headwinds on their own, and a split Congress compresses returns further.
Could the policy shift matter less than feared?
Morgan Stanley's Salvatore argues that "the macro impact of a power shift may be far smaller than markets expect."
Her logic: the policy vectors driving markets — tariffs, geopolitics, deregulation — are likely to persist regardless of which party controls Congress.
This reflects a deeper judgment: whether the AI trade holds up ultimately depends on earnings delivery, not politics. Policy adds a discount variable, not a verdict.
Beyond AI — which other sectors are flagged?
Prediction markets — platforms where users bet on election or event outcomes — are singled out by Mills as a top Democratic legislative target, with new restrictions and consumer-protection rules likely to follow.
Defense spending is also listed as a potential risk area.
This means → election risk is not an AI-only story. Financial innovation and government-spending sectors face the same need to reprice political uncertainty.
Content is for reference only, not financial advice.