Why the stock market is unexpectedly rallying in the wake of the Democratic blue wave

Call it a contrarian move. It has been a riveting 12 hours or so in the markets as investors slice and dice the midterm election outcomes.

Initially, stocks got hammered as the results trickled in. The thinking was that Democrats are less pro-business than Republicans, and since they will control the House and the Senate, there goes the corporate profit miracle that has driven the markets over the past two years.

But something very interesting has emerged after that initial knee-jerk reaction. Stocks are rallying on Wednesday — big-time!

Here are three reasons I think we're seeing this play out.

First, the midterm election results threaten to significantly disrupt AI data center expansion as voter backlash over soaring utility bills, grid instability, and water usage drive a sharp political pivot toward tighter regulatory oversight. That is being viewed as a positive for hyperscalers such as Alphabet ( GOOG , GOOGL ) and Amazon ( AMZN ) in that they will be forced to pull back on spending, which would boost free cash flow.

Free cash flow declines have been at the heart of the latest AI stock sell-off, so if cash flow outlooks brighten up at the biggest companies driving the market, all the better.

Second, with the elections over, the cloud of uncertainty that had begun to seep into markets in recent weeks has been lifted. Now investors can better place their chips where they see fit.

As the team at the Stocktrader's Almanac pointed out, six months after the past 19 midterm elections, the S&P 500 ( ^GSPC ) has been higher 100% of the time, with an average gain of 14.18% .

Third, there is this callout by Goldman Sachs strategist Jan Hatzius today that also gets to the heart of this day-after rally.

Hatzius wrote: "The larger-than-expected majorities could give them slightly greater leverage in negotiations with the White House, but will also dilute the influence of small factions within the Democratic caucus. We expect Democrats to use fiscal deadlines to seek to limit the war with Iran, roll back selected tariffs, and reverse spending cuts enacted last year."

I read that as a pro-corporate bottom line.

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