Author: Zhang Yaqi, Wall Street Observer

The Democratic Party swept both houses of Congress, triggering drastic sector rotations in the US stock market. Data center operators, defense contractors, and assets related to Trump were sold off, while sectors like clean energy and health insurance rebounded significantly. The market is reevaluating a new landscape with stricter regulations and shifting policy priorities.

The scope of the Democratic victory exceeded market expectations, not only breaking through traditional Republican strongholds but also winning major AI data center hubs in Texas and Georgia.

Texas elected its first Democratic governor in over 30 years, Gina Hinojosa, whose campaign platform clearly advocates for a temporary halt on data center construction, leading to further woes for related stocks. At the same time, the previously expected $1.5 trillion expansion of the defense budget, seen as unobstructed under a Republican Congress, seems to be off the table.

The core logic behind this sector rotation is: Democratic control of Congress will reverse the regulatory easing path that has dominated the past two years under Republican leadership. The policy dividends for AI infrastructure investment are facing reevaluation, while previously pressured sectors like clean energy and health coverage are likely to gain stronger legislative support.

AI Data Centers: Regulatory Pressure Impacts Valuation

Data center operators are the first to be hit.

Applied Digital and CoreWeave fell by 8.8% and 9.5% respectively, while Cipher Digital plunged 21%. Companies transitioning from Bitcoin mining to AI infrastructure were also severely impacted—Hut 8 dropped nearly 23%, Galaxy Digital decreased about 14%, MARA Holdings fell around 7%, and Core Scientific and IREN each saw declines exceeding 10%.

The data center construction boom this year has triggered a strong public backlash. Analysts believe that while a Democratic-led Congress may struggle to substantively halt construction through legislation, it will significantly increase the likelihood of hearings and investigations, indirectly raising project costs and uncertainty.

Mark Malek, Chief Investment Officer of Siebert Financial, stated: "AI infrastructure construction will not disappear; it will only become more expensive. Reduced tax incentives and increased responsibilities for electricity and water costs will compress the return space, making profit margins increasingly critical for investors. The most vulnerable AI companies are those heavily reliant on financing, not the largest capital expenditure firms."

According to research firm SemiAnalysis data, Texas will contribute nearly 30% of new data center capacity in the US by 2028, far exceeding other states. Brian Dobson, Managing Director of disruptive technology equity research at Clear Street, pointed out: "The political shift in Texas may lead to additional regulatory measures for data centers, which would benefit established institutions with good corporate citizenship records."

Companies providing electricity and equipment support for data center construction are also under pressure. GE Vernova fell 11.5%, and two major power companies with significant exposure to Texas data center projects, Constellation Energy and Vistra, declined 9.2% and 15.4% respectively.

Hyperscale Cloud Providers: Resilient Amid Adversity

Amazon and Microsoft each rose about 6%, recording their largest single-day gains since late July last year, while Google increased by 4.6%.

The market logic is: If the pace of new data center construction slows, the scarcity value of existing assets will rise, which may also help curb the expanding AI capital expenditures of large tech companies. Investors had previously punished these stocks due to increasing debt for AI investment and uncertain return prospects.

Art Hogan, Chief Market Strategist at B. Riley Wealth, stated: "Hyperscale cloud providers already have existing data centers; the lack of many new builds means these assets are more valuable. The slowdown in construction pace will also lead to a slowing of capital expenditure, which is a certain positive impact for hyperscale cloud providers."

Some market participants believe this sell-off has been overdone.

Adam McCarthy, Research Director at LO:TECH, pointed out that the Trump administration has consistently supported AI development strongly, making the significant drop in data center-related stocks seem excessive. The existing converted mining infrastructure, under a tightening regulatory environment, may actually be more valuable.

Elon Musk-Related Assets: Political Risk Premium Emerges

SpaceX's stock price fell 3.5% to its lowest level since mid-August, while Tesla dropped 3.3%.

Kathleen Brooks, Research Director at XTB, noted that the election results have raised doubts about potential merger plans for SpaceX and Tesla. "While Congress cannot stop a merger, it can delay the process through increased scrutiny. Musk has invested hundreds of millions in campaign funds for the Republican Party, and now that his political opponents have regained control of Congress, stocks related to Musk may continue to be under pressure."

Trump-Concept Cryptocurrency Assets Decline Across the Board

According to CoinGecko data, the WLFI token under World Liberty Financial, co-founded by Trump, decreased about 7% in the past 24 hours, while its eponymous meme coin fell about 17%.

David Wachsman, a spokesperson for World Liberty Financial, stated that the company "has always complied with all applicable US laws and regulations since its inception," adding that "if Congress targets a compliant company dedicated to expanding the dollar's circulation without cause, it is concerning."

Noelle Acheson, author of the crypto asset research newsletter "Crypto is Macro Now," pointed out that this drop "reflects both a diminishing halo effect for related assets and the market's expectations of potential investigations or legal prosecutions."

At the same time, shares of Trump Media & Technology Group fell as much as 17%, reaching an all-time low; leveraged ETF product DJTU, which tracks this stock, dropped 32%.

Defense Contractors: Expectations of Budget Expansion Undermined

The defense sector broadly declined, with Northrop Grumman falling 3.7%, RTX, Lockheed Martin, and L3Harris all experiencing declines between 3% and 6%.

Earlier market expectations that the $1.5 trillion defense budget proposed by Trump would pass unobstructed in a Republican-controlled Congress have changed with the Democratic takeover.

Lale Akoner, Global Market Strategist at eToro, stated: "Difficult debt ceiling negotiations may delay spending increases, and companies more reliant on new government contracts will face greater risks than those with stable contract foundations. The real risk is that spending growth is lower than expected, leading to price corrections."

Clean Energy: Policy Expectations Drive Rebound

The clean energy sector rose across the board.

First Solar increased by 8.4%, home solar installer Sunrun rose 6.9%, inverter manufacturer Enphase Energy grew by 8.8%, and clean energy developer NextEra Energy went up by 4.6%. The European market reacted similarly, with Denmark's Vestas rising 2.9%, Orsted increasing by 4.6%, and Portugal's EDP Renewables adding 2.8%.

Investors bet that Democratic control of Congress will provide stronger federal policy support for clean energy and increase resistance to efforts to overturn emission regulations. The Democrats may also utilize the Congressional Review Act to halt regulations relaxing sales restrictions on gasoline vehicles.

Paul Jackson, Global Market Strategist at Invesco EMEA, stated, "The more oil and gas prices rise, the stronger the economic incentive to promote clean energy."

Healthcare Rising, Private Prisons Declining: Policy Direction Determines Stock Prices

The healthcare sector benefited from a shift in policy expectations. Hospital operators HCA Healthcare and Universal Health Services rose 8.5% and 6.8% respectively, while insurers Centene and Molina Healthcare increased 7.3% and 6.3% respectively.

Morgan Stanley analysts pointed out in their report: "This election result will provide more space for Congress to advance Democratic healthcare policy priorities, including restoring enhanced subsidies for the Affordable Care Act or reversing employment requirement provisions in Republican healthcare Medicaid cuts. While we still believe the likelihood of substantial healthcare policy changes before the next presidential election cycle is low, the election results may alter the narrative of policy directions."

Private prison operators showed the opposite trend. GEO Group and CoreCivic fell 3.8% and 2.1% respectively. The two stocks have risen significantly since Trump won the presidency two years ago, as his hardline immigration policies have continuously boosted market expectations for increased demand for detention facilities, while Democratic control of Congress challenges this logic.

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