A blue wave in the midterms could tank markets

With the liberal press joyfully predicting that Democrats will take over the House and possibly the Senate in the November midterms, why aren’t investors pricing in a likely U-turn on some of President Trump’s pro-business agenda? Or worse — a slowdown in the AI juggernaut that continues to drive equity markets higher?

After all, Sen. Bernie Sanders (I-Vt.) and many of his leftist colleagues want to stop the rollout of new AI models and the building of data centers altigether at least, for now. . If they take charge of Congress, won’t the “super intelligence” companies, as Trump calls them, be in trouble?

Stuart Kaiser, head of U.S. equity trading at Citi, recently told a Fox Business audience that options markets show Election Day to be the biggest event moving the stock market currently — bigger even than interest rates.

But on the day Kaiser spoke, markets were bursting through all-time record highs , even as headlines, backed up by polling, were predicting a blue wave on Election Day. Betting site Polymarket puts the odds of Republicans losing the House at 90 percent, and Democrats gaining control of the Senate at 60 percent. Just weeks ago, that site had Republicans keeping the upper chamber.

Dan Clifton, head of policy research at Baird Strategas, cautions that “Republican Senate campaigns … are in a near panic mode.” He points to similar circumstances in 2006: “a second-term Republican president with an unpopular Middle East war and high gasoline prices thought the party could maintain the Senate,” but “one month later Democrats won 30 House seats, 6 Senate seats, and 6 gubernatorial races.”

Are investors indifferent to which party is in charge or are they simply tuning out all the dire projections of losses by Republicans?

For sure, political swings can impact markets. The election of Trump to the Oval Office in 2016 and again in 2024 caused stocks to surge, for good reason. The president campaigned on pro-growth measures like lower taxes, promoting energy independence and lighter regulations, among other issues such as securing the border. In the six weeks that followed his 2016 election, the S&P 500 rose 6 percent and gained 21 percent over the ensuing year . Markets greeted Trump’s 2024 win with a 4.6 percent jump, and gained 17.5 percent over the next year.

Of course, markets do not always cheer an incoming president . Six weeks after Barack Obama was elected president in 2008, markets had sold off 9.2 percent , and the next-day response to Obama’s victories was negative in both 2008 and 2012.

In a note earlier this year, Bank of America wrote that stocks have moved higher after every postwar midterm, with the fourth quarter posting the best results of the year. Specifically, the bank notes that since World War II, the S&P index has risen in every six- and 12-month period after a midterm, on average by 13 percent and 14 percent , respectively. Maybe that’s why investors are somewhat nonchalant.

And yet this cycle could be especially bruising for businesses and for equity markets.

The Democratic Party has been infiltrated by radical far-left elements hostile to many of our leading industries. Likely wins by candidates like Democratic Socialist of America Darializa Avila Chevalier (D-N.Y.), running in New York’s deep-blue 13th congressional district, will add to the number of far-left members of the House who aspire to smash America’s capitalist economy and embrace socialist measures like Medicare for All and universal housing. Chevalier also opposes Israel and has called the U.S. a “f—ing disgrace,” once claiming in a since-deleted X post, “I forgot to get napkins so I just wiped my hand on the American flag behind me.”

These people will not be easy to manage. There are seven self-described democratic socialists running for Congress this year ; most won primaries in districts where their election is practically guaranteed. They will join Sanders, Rep. Alexandria-Ocasio Cortez (D-N.Y.) and others who make up the Progressive Caucus, a group of about 100 lawmakers — nearly half the Democrats in the House.

Like the right-wing of the Republican Party, they will punch above their weight. If Democrats achieve only a narrow majority in the House, which appears likely , the leadership will need their votes to legislate, as current Speaker Mike Johnson (R-La.) has had to rely on his party’s fractious Freedom Caucus on numerous occasions. That means concessions will have to be made. A few hard-left House members could block spending for the military, push for new bank regulations or demand safeguards around AI that could slow that industry’s progress.

Despite investors appearing sanguine about the Republicans continuing to control the Senate, Clifton claims that “equities (have been) pricing in a Dem sweep since August 1.” Industries like banks and defense companies likely to be targeted by the left have indeed trailed the market over the past three months, but continued gains by semiconductor companies and other AI-related firms, which some analysts say comprise as much as half of the S&P 500, show investors may not be ready for a possible blue wave.

It isn’t just stocks that could be hurt by Democrats’ hostility toward AI. The industry is also fueling an investment and construction boom, boosting economic expansion and blue-collar hiring. Productivity gains and corporate profits could be crushed by adverse regulations.

It is possible that the left’s anti-AI and anti-data center protests are just political posturing. But given what’s at stake — for the country and for stocks — a blue wave could get ugly.

Liz Peek is a former partner of major bracket Wall Street firm Wertheim and Company.