By Lewis Krauskopf
NEW YORK, Oct 22 (Reuters) - Public opposition to data centers may jolt the AI trade as the US midterm elections approach, with a strong Democratic showing potentially hampering the buildout that has lifted stocks.
AI has driven the US stock bull market that just marked its fourth anniversary, as companies such as Alphabet and Amazon pour money into building data centers. AI's importance to the market makes investors highly sensitive to obstacles that could slow the development pace,
with spending on data centers and other AI infrastructure expected to top $1 trillion next year, boosting corporate profits.
Public backlash is one of those obstacles. As the massive data centers proliferate, many Americans are concerned about the strain on the environment and impact on energy costs, as well as about the technology itself.
"This is and has become a very tangible issue," said Christopher Gannatti, US chief investment officer at WisdomTree. Since the launch of ChatGPT in November 2022, he said, "the key signal for the market has been how much money are these five or six huge companies spending" on data centers.
Investors have banked on an optimistic outlook for AI expansion, and any question about its rapid growth continuing causes sharp market moves. Several segments of the AI sector have stumbled in recent weeks as debt concerns centered on cloud company CoreWeave.
Democratic victories in both chambers in the November 3 elections, which would wrest control of Congress from President Donald Trump's Republican Party, pose the greatest AI-related threats of the potential midterm outcomes, market watchers say. A Democratic sweep of the Senate and House of Representatives is the most likely outcome, according to trading on prediction markets Kalshi and Polymarket.
Analysts are dubious about prospects for national legislation that would significantly stall data center construction. However, they say Democratic leadership of the House and Senate would likely mean more hearings and investigations related to AI and the data center buildout.
Investors are also focused on state and local races where data centers have become pivotal issues and where authorities also hold sway over the pace of development.
DEMOCRATIC CONGRESS COULD INCREASE AI SCRUTINY
AI is not purely a partisan issue, as Republican voters also express concerns about data centers, but opposition appears stronger among Democrats. A Reuters/Ipsos poll released this month showed 69% of Democratic registered voters back limits on building data centers, compared with 43% of Republicans.
Even with a Democratic sweep, analysts doubt a bill that significantly impedes data center expansion would become law.
Trump — who has been supportive of AI — would likely block such legislation, said Matt Gertken, chief geopolitical strategist at BCA Research.
"The bill that is going to pass, and the bill that Trump is willing to sign, will be an AI regulation bill, but it probably won't be slamming the brakes on capex and construction," Gertken said.
Trump said on Wednesday that companies building data centers should pay a "dividend" to communities if they want to make them popular.
Some in Congress, even on the Democratic side, might also be reluctant to enact legislation that undermines data center progress, due to its importance for economic growth and because of fears of losing competitive ground to China.
Still, if they control Congress, the Democrats are expected to apply more scrutiny to AI, including data centers, which could raise market volatility.
"There will be congressional hearings. There will be investigations," said Brian Gardner, chief Washington policy strategist at investment bank Stifel. "You never know where that stuff leads, and there can be negative headlines."
LOCAL RACES IN FOCUS FOR DATA CENTER OVERSIGHT
The oversight that state and local authorities have over data centers also means investors will be unusually focused on specific elections next month. Investors are watching at least a half dozen states such as Texas for which party wins control of the governor's seat or the legislature, while also following specific House and Senate elections and even votes for positions such as utility commissioner.
"Data centers are a real political issue, a really salient one in these state and local races," said Maxwell Shulman, a policy research analyst at Beacon Policy Advisors in Washington. "And depending on which party takes control, there really could be implications for the regulations and the restrictions that data centers might have to face going forward."
Strategists at investment bank Morgan Stanley are monitoring the elections for governor in Texas, Ohio, Pennsylvania, Georgia, Nevada, Wisconsin and Michigan.
"Because it is so disproportionate, the states where that investment is going really do have to be a focus for investors," Shulman said.
Policy uncertainty around data centers is unlikely to "derail" the AI investment theme, said Kevin Shea, senior equity analyst at BNY Wealth. "But what it can do is disrupt the timing and the cost," Shea said.
(Reporting by Lewis Krauskopf; additional reporting by Jason Lange in Washington; editing by Megan Davies and Rod Nickel)
