For President Donald Trump, this marks a significant shift in the political landscape for the remainder of his second term. However, for investors, an equally interesting story is unfolding below the national level, in the states where the infrastructure that underpins artificial intelligence (AI) is being built.

Data centres, the vast facilities that power AI, became an important campaign issue across the country, and nowhere more so than in Texas and Virginia. Between them, these two states host the large majority of existing and planned US data centres, with roughly a third of upcoming construction due in Texas alone.

Democrat Gina Hinojosa, who made curbing data centre development a central part of her campaign, won the Texas governorship. Democrats were also elected as governors in Georgia and Pennsylvania, the third and fourth largest data centre states. Virginia, the second largest, did not elect a governor this year, but Democratic lawmakers there are leading the push for a moratorium.

A nationwide ban remains unlikely, since the president can veto federal legislation. But the more likely battleground is local rather than federal. Decisions on planning permission, water use and tax breaks sit with states, counties and town councils, and that is where opposition has been gaining ground.

An increasing number of local areas are passing data centre moratoriums. The midterm results put more officials who are sceptical about data centres into exactly the offices that make these decisions.

However, the technology giants are not standing still. With combined capital spending of more than $800 billion this year, primarily on US data centre construction, Amazon, Google, Meta and Microsoft have every incentive to win communities over. Their response so far has been to offer more and ask for less. They have promised to pay the cost of the power infrastructure that feeds their data centres, and Meta and Amazon have each pledged $1 billion in financial incentives to host communities.

We believe this is likely to become the template: projects will still get built, but potentially at a higher cost and on longer timelines. This is likely to weigh on the returns companies achieve through investment in AI infrastructure, although recent company updates have suggested these returns are currently high.

What else could the midterms mean for investors?

While the Democrats now have far greater power over new legislation, Trump can still use executive orders, which allow him to direct government departments using powers he already has. It is reasonable to expect the president to now seek to introduce voter-friendly measures to try to boost his administration’s popularity, and typically these tend to be steps that are positive for the economy and stock market.

The cost of living and fuel prices were key issues during the election campaign, and Trump will now face even greater pressure to resolve the US-Iran conflict, which has helped drive up inflation. While stressing their military capabilities, the Iranians have continued to express their willingness to give diplomacy a chance to succeed. If the conflict can be resolved, this is likely to be positive for stock markets and for bond investors.  

From a broader investment perspective, markets dislike uncertainty more than any particular political outcome, and historically, midterm elections have been a moment when uncertainty clears. While past performance is no guarantee of future returns, the pattern has been remarkably consistent. Morgan Stanley data shows the US S&P 500 stock market index has delivered positive returns over the 12 months following each of the 19 midterm elections since 1950.

Divided government has also tended to sit comfortably with investors, because it limits the scope for sweeping policy surprises. This does not mean this will happen again, and today’s elevated stock valuations and the open question over AI regulation are worth keeping in mind.

Nonetheless, as an investment team, we remain positive on the US. It is one of the world’s strongest economies, with many leading global companies. The US is also home to world-class research and universities, abundant natural resources and energy, and it has an impressive track record of turning innovation into successful businesses.

That is why the US remains the largest equity (company shares) allocation in our portfolios. But political change, high expectations for parts of the technology sector and the concentration of the US stock market in a limited number of giant companies are also reminders of why we believe in diversification.

The country remains an important source of opportunity, but it is not the only one. We continue to see attractive investment potential in the US but we also see opportunities elsewhere, and diversification remains central to how we build portfolios.

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This article is provided for general information purposes only and should not be construed as personal financial advice to invest in any fund or product. These are the investment manager’s views at the time of writing and should not be construed as investment advice. The opinions expressed are correct at time of writing and may be subject to change. Capital is at risk. The value and income from investments can go down as well as up and are not guaranteed. An investor may get back significantly less than they invest. Past performance is not a reliable indicator of current or future performance and should not be the sole factor considered when selecting funds.