Investors are bracing for the “most important” US midterm elections in years, the results of which are expected to determine the direction of everything from state-level AI policies to federal spending.
Big fund managers told the FT they were stepping aside ahead of Tuesday’s vote, a shift that comes after bond investors rushed to the market in recent weeks to secure attractive returns thanks to soaring bond yields.
“It’s a moment of pause,” said Greg Peters, co-chief investment officer at PGIM Credit, after “a big move” in U.S. Treasuries. “This is the most consequential midterm election cycle we’ve seen in a long, long time,” he added.
The race will be instrumental in shaping issues critical to Wall Street, including AI data centers and U.S. government spending at a time when the national debt is at a record $40 trillion.
The midterm elections come as the AI industry faces growing questions over its gargantuan borrowing plans, contributing to the tech-focused Nasdaq 100 stock index falling into correction territory on Friday.
Major hyperscalers including Alphabet, Amazon and Meta this week reported weaker-than-expected third-quarter results and detailed the huge sums they still need to raise to fund AI development.
Although he was optimistic, Vishal Khanduja, head of large markets fixed income at Morgan Stanley Investment Management, said his team was taking pause while awaiting midterm results and upcoming economic data releases.
Khanduja pointed to a U.S. Treasury repayment announcement scheduled for Wednesday — a day after the midterm elections — and a U.S. inflation figure on Nov. 10.
“We are resisting tactically to achieve these results,” he said. “(We) resist the urge to see a binary midterm outcome directly determine, in a vacuum, what that would mean for rates and curves.”
Peters said that based on market-priced interest rate expectations, he sees “no opportunity for the 10-year underbelly to really continue to perform.”
“I think the scope for further gains from a price appreciation perspective is limited at this point,” he added.
Khanduja said a divided Congress was his team’s base case scenario and that “overall, he should be bullish on bonds,” helped by the prospect of “greater fiscal restraint.”
Although Democrats are widely expected to win the House and be slightly favored in the Senate, investors have warned that U.S. President Donald Trump’s broad executive powers and presidential veto are likely to limit Congress’ authority.
This complicated outlook means that gubernatorial races taking place in 36 states could have the biggest impact on markets.
“I think the gubernatorial races matter a lot in this cycle. The results of these races could have a significant impact on AI development and capital spending,” said Jason Granet, chief investment officer at BNY. “This is especially important in states where there are many data center centers and infrastructure,” he added.
PGIM’s Peters agreed. “The senators are also important, but I think it’s the governors who are on the ground… It’s going to be really interesting to see how negative or not negative this potential Democratic success is,” he said.
Two of the largest data center hubs – Texas and Ohio – face tight gubernatorial races, with Democratic victories expected to dampen AI growth.
With the importance of a large Democratic sweep being “nuanced” due to Trump’s remaining powers, Khanduja said “a Republican sweep…might be the most pessimistic.”
“I wouldn’t say at all that this price is fixed in the markets,” Khanduja added. “So you might see a little bit more of a reaction from that.”
Kristina Hooper, chief market strategist at the Man Group, said a contested election would be “the biggest thing markets would react to.”
However, some argued that investors were preoccupied with other important issues of the day.
Daniel Gamba, co-chairman and chief commercial officer of $1.8 trillion asset firm Franklin Templeton, said that at a recent conference in Asia attended by asset managers, “not a single moment of the conversation was about the midterm elections.”
Recent conversations have included AI, the trajectory of the Federal Reserve, and geopolitics, among other topics.
Referring to a recent stock study from the Franklin Templeton Institute, Gamba said that “based on experience, no one expects a radical change in the markets” following Tuesday’s vote.
Clients are concerned about how portfolios are constructed, he added, but that is “more to do with AI, data centers, index concentration” and “the center of the discussion is diversification.”
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