What smart people are saying about the midterm's impact on data centers and the AI trade

• The midterms have stoked fears that America is about to pump the brakes on the AI buildout.
• Investors fear the blue wave will lead to tighter regulation and oversight of data center construction.
• The result could be a divergent AI trade, with a new class of winners and losers in the space.

The blue tsunami is recalibrating the market's bullish view of the AI trade.

Stocks were clobbered on Thursday, a day after post-election euphoria lifted the Dow to its best day in 18 months.

Democrats' landslide victory in the midterm elections has awakened fears of a slowing down in the AI buildout. The thinking is that the Democratic lawmakers and governors will push for more regulation and oversight of data centers a time when AI infrastructure is powering the bull market in stocks and contributing heavily to economic growth.

Texas has emerged as a key data center hub, and Democrat Governor-elect Gina Hinojosa is being viewed an opponent of AI infrastructure in a state taht's expected to account for as much as 30% of data center development through 2030.

Here were some of the big moves in the tech sector on Thursday:

"Election was the Worst-Case Near-Term Scenario," analysts at Jefferies wrote in a note on Thursday.

Here's what smart people are saying about a possible data center slowdown — and how it could impact the AI trade going forward.

Blue sweep has "significant implications" for the AI trade: Goldman Sachs

Economists at Goldman Sachs said there would be major consequences for the AI trade after the blue wave electipn, noting that Republicans lost governors' elections in Texas, Ohio, Nevada, Georgia, and Michigan, states that have become hubs for data center development.

"On AI and data center regulation, Democratic wins at the state and local level are likely to have significant implications," a team led by the bank's Jan Hatzius wrote. "We expect Democratic governors in Texas, Georgia, and Michigan to impose conditional moratoria pending new legislation restricting data centers."

"However, since data centers are low on the list of priorities for voters this election, we expect that the issue will fade somewhat in importance in the ensuing months and that these moratoria will not be long-lived if they are enacted," Hatzius added.

In a previous note, the bank said it expected lawmakers to focus on broader AI regulation rather than data center regulation. It added that a country-wide data center moratorium looked "unlikely."

Data center buildout will be "very challenging": Meta Platforms

Meta President Dina Powell McCormick said data center construction would likely be more difficult going forward. New projects will likely come under greater scrutiny, she said, speaking at the Wall Street Journal Tech conference in California on Wednesday.

"What I mean by that is to start new data center build-outs today in the United States will be very challenging," McCormick said.

Firms may also be more incentivized to look to build data centers outside the US, she added.

"I can also tell you that every hyperscaler is now thinking about 'Do we need to build outside the United States?' Because they're enormous investments, hedging those investments is a wise thing to do," she said.

Meta is among the biggest spenders on AI infrastructure. Its most notable projects include its $50 billion Hyperion data center in Louisiana and its Prometheus data center in Ohio.

Data center slowdown may not impact AI spend until 2028: JPMorgan

Strategists at JPMorgan said they read the "Blue Tsunami" as a constraint on data center spending in the long-term, though that may not translate to reduced investment right away. The bank said it does not anticipate "any material changes" to 2027 capex spending forecasts, though tighter regulation could have "some impact" in 2028 and beyond.

"Slowing overall data center development and deployment is not necessarily all bad," the bank wrote in a client note. "Shallowing the growth curve should allow more time for monetization to catch up to spending, and likely keep compute in short supply longer than the counterfactual case."

Capex concerns have been front-and-center for investors lately, with some fearing that a slowdown in investment could produce a series of knock-on effects for other suppliers in the industry. Amazon, Alphabet, Meta, Microsoft, and SpaceX, five of the largest spenders in the AI trade, are expected to spend more than $800 billion on capex this year alone.

Data centers in space: Elon Musk

SpaceX CEO Elon Musk floated the idea of building data centers in space hours after the Democrats secured a victory in Congress. SpaceX has said its goal is to launch a "constellation of a million satellites that operate as orbital data centers," an idea that some industry experts have brushed off as costly and logistically challenging.

"Data centers in space looking pretty appealing right now," Musk wrote in a post on X early Thursday morning.

SpaceX, which is headquartered in Texas along with Tesla, has planned to build several large-scale data centers in the state, The Information reported this summer. The firm's largest data centers are located in Tennessee.

Data center crackdown could impact broader economy: David Rosenberg

Top economist David Rosenberg flagged a growth slowdown that could be sparked if Democratic lawmakers push to slow data center construction.

The Rosenberg Research president, who is known in markets as a permabear, has expressed skepticism over the pace of economic growth in the past, pointing that much of the US's expansion in recent years has been fueled by AI, while other sectors in the economy have flailed.

"How much of this new dent in the GDP growth outlook is going to factor into the Fed's thinking? Because a good chunk of Kevin Warsh's growth and inflation prognosis was hitched to the AI spending boom. It hasn't necessarily ended, but the shape and movement in the demand curve surely are now less pro-growth and inflationary," Rosenberg wrote in a client note on Thursday.

Data center construction could migrate to other states: Jefferies

The firm said it maintained a "constructive" outlook on data centers overall, but updated its projections for growth in the industry to reflect a "more restrictive regulatory environment."

The firm now anticipates incremental data center capacity rising 112.8 gigawatts through the end of the decade, down from the prior estimate of 122.4 gigawatts.

"Data centers still get built, but barriers to entry are rising, and new construction starts should migrate to friendlier states," Jonathan Petersen, an analyst at the firm, wrote in a note.

The firm also flagged the risk of "tighter restrictions" on data centers in New Mexico, Ohio, Michigan, Kansas, and Nevada, adding that it would continue to monitor policy moves from the new governors of those states.

President Trump could still push data center expansion: Edwards Asset Management

Though the Democrats are in control of Congress, the president still has powers at his disposal to encourage data center construction through the remainder of his second term, Bob Edwards, the chief investment officer of Edwards Asset Management, wrote in a note.

"We are not concerned about what the blue wave means for the buildout of AI, since the President still has the veto pen and since data centers bring jobs and tax revenue, and the economy was a big issue in this latest election season," Edwards said.

The president has the power to veto any bill passed by Congress, though lawmakers could also override a regular veto with a supermajority vote in the House and the Senate.

"The AI trade is here to stay, but it remains volatile," Edwards added.

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