Key points
- Democrats win the House and Senate, which Skanda Amarnath says matters structurally because the Senate confirms Supreme Court and Fed appointees.
- Bank of America's Michael Hartnett warned a Democratic sweep could sink the S&P 500 10%, but the index rose about 1.5%.
- Amarnath says AI-sensitive spending is nearing 8% of US GDP, with inflation likely to stay near 3%.
What a Democratic Senate Means for the Fed and AI
The midterm sweep gives Democrats the Senate, which matters less for passing laws than for confirming judges and Federal Reserve governors, since 60 votes are still needed to break a filibuster and gridlock is the base case. It landed in the middle of the AI buildout. The states hosting data centers, Texas, Georgia, Pennsylvania, Ohio, Virginia and Wisconsin, now have Democratic governors, and investors had already stopped rewarding raw capex.
Takeaways
- Senate control matters most for appointments. Legislation still needs 60 votes to break a filibuster, so gridlock is the base case. The Senate confirms Supreme Court justices and Federal Reserve governors, and Amarnath says the Fed board is less partisan than the court.
- Data center states elected Democratic governors. Texas, Georgia, Pennsylvania, Ohio, Virginia and Wisconsin all now have Democratic governors, and siting is mostly a state and local matter. Tax breaks for data centers became politically toxic over the past year after being routine for a long time, including in blue states.
- Markets stopped rewarding raw AI capex. Investors were already skeptical of heavy spending before the election. Amarnath says capex is a cost for hyperscalers even when EBITDA misses it, because it shows up in depreciation and amortization, and Oracle has issued equity as funding shifts from cash to bonds.
- Tariffs and the war decided the campaign. Amarnath says those were the two places where policy visibly mattered, with tariffs identifiably moving prices, and Democrats will campaign on the president raising costs. He doubts Republicans will restrain executive power over trade, though John Thune dislikes aggressive tariffs.
- Inflation may settle near 3 percent. Amarnath counts energy and tariffs among the forces holding inflation up, and says the energy impulse is unlikely to get more aggressive over the next several months. Costs from Canadian tariffs that were imposed and then removed have not yet passed through to consumers.
- AI-sensitive spending approaches 8% of GDP. Amarnath puts AI-sensitive spending, mainly tech hardware and industrial equipment, close to 8% of US GDP. He says the non-AI economy is fine but not amazing, housing is soggy, and booms tend to be imbalanced.
The Texas pitch
- Delaware lawsuits rankled founders who disliked obligations to shareholders, pushing Elon Musk and others to look for a friendlier place to incorporate.
- Texas created a new business court and courted the companies that moved.
- Democrats swept the statewide races by close to double digits.
- Tesla fell 10% and SpaceX 7 to 7.5% the day after the vote, unwinding part of the 2024 election trade.