The artificial intelligence trade that has powered U.S. stocks to record highs this year could face some headwinds from an unusual source: the midterm elections. The S & P 500 hit an all-time high this week, topping 7,600 for the first time, as investors continue to pile into AI-related names such as Nvidia and Micron Technology . In fact, the VanEck Semiconductor ETF (SMH) has soared 74% year to date, and the S & P 500 has advanced 11%. But as the Nov. 6 U.S. midterm elections approach, AI names could hit some bumps in the road, particularly as Democrats are expected to flip at least the House of Representatives. A divided government could make it more difficult for companies in the space to move forth with their agenda. "Two areas that you're seeing increasing as a focus for Democrats are potential data center moratoriums. I don't think that passes, but if we're talking about data center moratoriums, there is a lot of market cap that is tied to the building and profitability and success of the AI trade," Ed Mills, Washington policy analyst at Raymond James, told CNBC. SMH YTD mountain SMH in 2026 In recent months, there has been a pushback on the data center boom , with political figures citing rising electricity costs and risks to grid stability as among the list of concerns. Mills also believes that the Democrats could push President Donald Trump on adopting a more hawkish stance on China. This could further restrict the trade of semi-cap equipment between the U.S. and China, Mills said. "Democrats would love to be running more hawkish on China than Trump has been. And if we see semiconductors getting restricted after we've seen a huge shift where Trump has been more open to the H200 from Nvidia … chips getting shipped to China, that could draw into question kind of the best performer this year in the stock market," he added. Nvidia, the most valuable company in the world with a market cap north of $5 trillion, is up 17% for the year. Other semiconductor names such as Taiwan Semiconductor and Advanced Micro Devices have popped 46% and 144%, respectively. What history shows Stocks tend to be more volatile in midterm election years. Data compiled by Canaccord Genuity shows the S & P 500 sees a loss of 3.87% in the second and third quarters of a midterm election year on average. The weakness is even more pronounced in the Russell 2000, which averages a decline of 9.12%, based on figures going back to 1982. And, if Democrats secure control of the House, it could mean lower returns. Strategists at Natixis found that, since 2000, the S & P 500 has performed better on average when one party is in control of government, bucking a long-term trend of stocks doing well with divided government. In that time, the S & P 500 has averaged a 10.9% return when Democrats are in power and nearly 12% when the GOP is in control, the data shows. Under a divided government, the benchmarks averages a return of just 4.8%. To be sure, Morgan Stanley head of U.S. public policy research Ariana Salvatore thinks the election may have little impact on the market this time around. "A change in power may matter less than you think to macro," Salvatore said in an April note. "We don't see the midterms producing a shift in policy direction that materially changes the macro outlook: the policy vectors that have driven markets (tariffs, geopolitics, de-regulation) are all likely to continue." That said, if the AI trade falters, it will have an adverse effect on the broader market. Strategists also highlighted other sectors that could be swayed by the November contest. Data centers, financials and defense Salvatore noted that a Democratic sweep would be the least beneficial outcome for data centers. On the other hand, they would benefit more from either a Republican sweep — or the party maintaining control of both the House and Senate — or a "fragile" Democratic majority, where the Democrats are divided and unable to agree on a policy agenda. "Data Center REITs see the Divided/Gridlock scenario as the more favorable for pricing power, while a Republican sweep could facilitate easier permitting/energy access to support build-out," she wrote. Investors seeking exposure to the data centers industry can consider the Invesco PHLX Semiconductor ETF (SOXQ) , which has an expense ratio of 0.19%. Mills, meanwhile, pointed to the financial sector as another area that could see an impact, particularly prediction markets, which he said has seen huge growth thanks in part to support from President Donald Trump and the Commodity Futures Trading Commission. He believes that high on the list of things for the Democrats to do would be passing legislation adding on new restrictions and consumer protections to the market. Investors can consider the State Street Financial Select Sector SPDR ETF (XLF) for exposure to the financial services sector. The fund charges 0.08% in fees. Mills also underscored his concerns about defense spending. "The Democratic Congress, I think, would be skeptical about massively increasing the defense budget, and I think that's been one of the concerns that has been out there for investors that I've talked to," Mills said. "If Democrats sweep, that makes it very difficult to get robust increases on the defense budget, because a lot of Democrats just don't trust President Trump and his use of the military." Salvatore and her team agreed, noting that defense spending would likely be higher in a Republican win outcome, while growth in spend would likely be negotiated in either split government scenarios. The iShares U.S. Aerospace & Defense ETF (ITA) offers investors a way to play within the defense sector. The fund's expense ratio is 0.38%. The Morgan Stanley strategist added that the least beneficial outcome for pharmaceutical and biotech companies would be a Republican sweep, since the potential to codify most-favored-nation prescription drug pricing deals into federal law would be greater.
<small>Source: CNBC</small>
