The U.S. stock market jumped Wednesday as investors digested the impact of the Resounding victories for the Democrats in the midterm congressional elections.
The Dow Jones Industrial Average climbed more than 1,500 points, or 2.9%, in afternoon trading, putting the blue-chip index on track for its biggest gain of the year. The broader S&P 500 index rose 1.7% while the tech-heavy Nasdaq Composite Index gained 1.8%.
Shifting political winds could affect a range of issues that influence investment returns, from the pace of data center construction and regulation of the cryptocurrency industry to proposals to cap credit card interest rates.
At the same time, Wall Street analysts do not expect the result to be derail a stock market She is driven more by robust corporate profits and solid economic growth than by politics.
“The magnitude of Democrats’ midterm gains don’t change much for the near-term political outlook, given that the party still lacks a filibuster-proof majority in the Senate and President Trump has veto power to block legislation,” Stephen Brown of Capital Economics said in a note to investors.
Shares of solar energy companies, dollar stores and hospital owners led the way as Wall Street tried to sort winners from losers following widespread Republican losses.
Investors, meanwhile, see risks for Mr. Trump’s social media company, the artificial intelligence sector and companies owned by Elon Musk, who has made large donations to Republicans. Trump Media & Technology’s stock price fell nearly 17% in afternoon trading, while shares of Musk-owned SpaceX and Tesla fell 3.4% and 2%, respectively.
Is blocking good for stocks?
Investors also expect the election results to deepen gridlock in Congress, with Democratic lawmakers now controlling both the House and Senate, and Mr. Trump threatening to exercise one’s right of veto to block any legislation he opposes.
Political gridlock has historically been good for markets because it limits Congress’s ability to pass sweeping tax and spending laws, reducing the risk of volatility, Wall Street analysts say.
At the same time, stocks generally performed well after the midterm elections. The S&P 500 stock index has risen an average of 15.5% in the six months since the last 14 midterm races, dating back to 1970, according to figures from the investment firm Edward Jones.
“Economic growth, inflation, interest rates and corporate profits have historically mattered more in overall investment performance than party composition in Congress, especially if the president and congressional leaders come from different parties,” analysts at the Wells Fargo Investment Institute said in a report.
“We do not expect radical political changes,” they added. “It is more likely, in our view, that there will be divided government alignment on affordability, energy policy and the opportunities presented by artificial intelligence.”
Beyond the Beltway, midterm election results could affect key questions for investors, such as the pace of data center construction, with huge spending on artificial intelligence helping to propel stocks to record highs this year while raising concerns about a bubble in tech stocks.
“In a divided government, policy implications at the federal level may be limited, but data center policy decisions fall to the state level and public utility commissions, making gubernatorial and utility races important alongside Congress, particularly Gov. Abbott’s loss in Texas,” LPL Research’s Jeff Buchbinder told investors.
“LPL Research continues to expect this growth to occur, but strong showings from Democrats in key data center states (and pushback from people not in my backyard) could slow it, potentially increasing regulatory pressure on AI infrastructure stocks including semiconductors, machinery, and power generation,” he added.
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