Wall Street warns AI stocks could face regulatory pressure if Democrats win midterm elections

By Zhitong Finance

The upcoming U.S. midterm elections are emerging as a growing concern for a stock market currently riding high on the AI boom.

In recent weeks, polls and prediction markets have shifted significantly in favor of Democrats, who are increasingly seen as likely to win control of at least one chamber of Congress. Wall Street strategists warn that if this scenario materializes, stocks that have benefited from the AI rally—many of which carry high valuations and little room for error—could come under pressure. The reason: potential congressional investigations, hearings, and even stricter regulatory measures.

Heightened Scrutiny on AI Safety

"If Democrats perform strongly in November, hearings on AI safety will not only increase in number but also become more aggressive," said Brian Mulberry, chief market strategist at Zacks Investment Management. He believes that headlines out of Washington could unsettle AI-related trades as traders grow concerned about potential congressional action.

Democratic leaders have reportedly been preparing to investigate companies linked to former President Donald Trump and his family. Additionally, a group of Democratic senators recently urged Trump to negotiate an agreement with China to mutually slow or pause AI development, according to reports.

Congressional Probes and an AI Special Committee

Tobin Marcus of Wolfe Research wrote in a note to clients last week that a recent surge in concerns over the potential risks of AI systems has made safety issues "a more tangible topic for Congress in 2027." The policy-focused strategist expects Democrats to establish an "AI special committee" that would summon industry executives for questioning and could even issue subpoenas.

Market observers have already flagged these risks. Last month, Bank of America's Michael Hartnett warned that a Democratic sweep of both the House and Senate—combined with a win in Texas—could trigger a 10% decline in U.S. stocks, citing potential policy shocks to AI-related sectors. Barclays strategists led by Jenny Yang and Alex Altmann noted that AI infrastructure and data center construction could face stricter scrutiny, a risk they say the market has "partially overlooked."

Broader Market Risks Beyond AI

Evercore ISI strategists led by Sarah Bianchi wrote in a report Tuesday that "the broadest market risk comes from investigations and hearings into industry-related issues, particularly in big tech/AI." They are especially focused on whether probes could reveal new information about失控 AI agents or internal corporate communications acknowledging AI safety risks.

However, AI is just one item on a long list of potential investigations. Evercore ISI believes the sheer volume of inquiries could overwhelm investors' ability to track them all.

The firm also expects Congress to investigate industries tied to voter concerns over the cost of living, including energy, healthcare, and food and agriculture. Strategists have previously warned that companies receiving U.S. government equity investments—such as Intel (INTC.US)—could also face risks.

The Trump Factor and Market Resilience

Even if Democrats win both chambers, President Trump retains veto power, making it nearly impossible for legislation to pass without his support. Trump has positioned himself as a supporter of the AI industry and has repeatedly rejected calls to restrict data center construction or slow the development of advanced models.

So far, investors have largely shrugged off regulatory concerns. After a period of volatility, the Philadelphia Semiconductor Index has risen 5.1% this week, and the tech-heavy Nasdaq 100 hit its first record high since June on Tuesday.

The "Blue Wave" Scenario and Future Risks

Still, the market is far from out of the woods. Beyond holding hearings, committees can also propose legislation. If a so-called "blue wave" materializes in November—as prediction markets currently suggest—U.S. stocks could face a shock as investors begin pricing in greater policy risks after the 2028 election, particularly around corporate tax increases and AI regulation.

"If Democrats sweep both chambers, key committees will fall into Democratic hands," wrote Scott Chronert, head of U.S. equity strategy at Citigroup, in a note to clients this week. "We see this as a modest headwind for AI trade targets and sectors that have benefited from regulatory easing. Over the next two years, a batch of market-unfriendly bills would land on Trump's desk awaiting vetoes. If that happens, a backlog of policy proposals could be rapidly enacted after 2028."