Warning Signs Abound for the Republican Midterm Elections, AI Bull Market Faces “Ballot Stress Test”: Heading Towards “Bubble 2027” or a Valuation Collapse?

According to Odaily Finance APP, a Reuters/Ipsos poll conducted from August 28 to 31 showed that 47% of registered American voters listed the cost of living as the most important factor deciding their votes in the midterm elections, and 71% of American adults disapproved of Trump's handling of cost of living issues; in the same poll, due to high energy costs and the resurgence of inflation, only 33% of respondents approved of his overall administration performance. These are preliminary results from media polls and cannot be directly translated into congressional seats or election win rates, but they largely indicate that energy, electricity prices, and the burden of household consumption have already become must-watch policy backdrops.

The control of Congress—i.e., control of both the U.S. Senate and House of Representatives—affects financial markets primarily through legislation, government support and funding for large-scale investment projects, investigations, and personnel appointments. In particular, a Republican hold on the Senate and Abbott's victory in the Texas gubernatorial election are crucial for the global AI computing power industrial chain's investment prospects and the valuation trajectory of core computing assets. Profit expansion continues to support the AI bull market, but the combination of long-term yields and policy reassessment triggered by the elections is threatening the valuation foundation of this bull run.

However, the midterm elections do not replace the president; even if Congressional control shifts, major tax reforms still require the legislative process, and the president retains veto power, which can only be overturned by two-thirds votes in both chambers. Therefore, a change in Congressional control does not directly equate to an immediate reversal of Trump's pro-business tax cut policies, comprehensive tightening of regulation, or a nationwide halt of trillion-dollar AI data center investments under party pressure.

The construction constraints faced by data centers have become more concrete. On August 3, Texas Governor Abbott ordered a full review of data centers advancing through the Texas grid operator's interconnection process, with projects unable to proceed until the review is complete. The state disclosed at the time that the incremental power demand from interconnection applications exceeded 474 GW, about 90% of which came from data centers; these are the sizes of applications and not existing operational capacity or confirmed orders. The review covers electricity, water use, tax incentives, and community impact, clearly demonstrating how the cost-of-living debate between the two parties, which is closely linked to the midterms, can impact AI infrastructure investments via interconnection conditions and project timelines.

The Bank of America strategy team led by Michael Hartnett—known as "Wall Street's most accurate strategist"—has released a report that brings U.S. policy conditions and funding costs into AI computing power valuation analysis: If the Republicans fail to win the Senate and lose both chambers, project approvals will be delayed, postponing computing power coming online and the actual monetization and profit formation of AI; Democratic control of Congress could raise financing rates, increasing data center construction costs and reducing the present value of future cash flows.

In this valuation framework, global semiconductor companies, data center power chain equipment providers, and leading "new cloud" AI computing leasing companies will inevitably be affected by negative expectations, which will eventually be validated through real orders, deployment pace, capital spending, and free cash flow. Such selling pressure may first manifest as a contraction in the valuations of AI-related stocks; if further approval and financing constraints cause cloud vendors to delay construction and equipment purchases, the impact could ripple through the industry chain to supplier orders, revenues, and operators' cash flows, escalating policy worries into profit headwinds.

Hartnett describes full Democratic control of both chambers as a major stress scenario: market concerns about higher taxes, stricter regulation, and restricted AI construction would increase, with corporate earnings forecasts and valuations both under pressure; accordingly, he foresees the possibility of a decline in U.S. stocks over 10%, a weaker dollar, and lower bond yields under this asset price mix. Comparatively, he sees Republican control of both chambers as a risk-on expansion scenario; Republican control of the Senate and Democratic control of the House as a moderately risk-friendly "stalemate Goldilocks" scenario.

Midterm elections enter the final sprint, frequent warning signs for the Trump-led Republican Party

With Labor Day on Monday, the final sprint of the campaign has unofficially begun. With only two months left before the November midterm elections, President Donald Trump's extremely low public support is threatening the Republican Party's slim majority in Congress.

Experts say the midterm elections are mainly a referendum on the occupant of the White House. In the Trump era, this is especially evident: for nearly a decade, he has been a dominant figure in U.S. politics, but in the last two years of his term, he may face strong political headwinds.

If Democrats win a majority in the U.S. House of Representatives—which seems very likely—the party can launch investigations into the Trump administration that could cause serious political damage, while forcing the White House to compromise on most legislative matters. Democratic leaders have already vowed to investigate what they call Trump's corruption and wrongdoing.

Analysts say the battle for control of the U.S. Senate is still too close to call; but if Democrats gain a majority in the Senate, they could block many of Trump's appointments, including Supreme Court nominations should a vacancy arise.

Although Democrats face their own challenges, including ideological differences between moderates and leftists, Trump’s unpopularity has itself become a political burden for Republicans.

The latest Reuters/Ipsos poll shows Trump's approval rating at a historic low, and the vast majority of respondents were dissatisfied with the Iran War and the state of the economy. The gap between his disapproval and approval ratings is nearly double what it was during the same period in 2018; that year, Democrats gained 40 seats in the House.

Democratic voters show higher enthusiasm for voting than Republican voters, and recent special and primary elections have also confirmed higher turnout by Democratic voters. Registered voters are 5 percentage points more likely to support Democratic candidates than Republican ones.

Historical precedent also favors the Democrats. Since 1938, except for two midterm elections, the party of the incumbent president has lost seats in the House in every other midterm election.

"I think there’s a sense the president hasn’t focused on what voters care most about, namely whether the cost of living is affordable," said Jessica Taylor, a Senate elections analyst with the Cook Political Report. "If you want to express your dissatisfaction with the president, during the midterms, the only thing you can do is vote against his party."

However, Democrats also face their own challenges. In a series of intraparty contests, progressive candidates—including democratic socialists—have unexpectedly defeated moderate establishment-backed candidates, raising questions about the party's leadership, campaign messaging, and internal unity.

Republicans still maintain several structural advantages. Currently, Republicans hold a narrow lead in the House with 218 seats to the Democrats’ 214. After winning an unprecedented redistricting battle midway through the ten-year cycle, they could net up to 10 additional seats just from the new map.

All 435 House seats and about one-third of the 100 Senate seats will be up for election on November 3.

Meanwhile, the Senate electoral map is more unfavorable to Democrats. Even if Democrats win tough races in Georgia, Maine, Michigan, and North Carolina, they still need to win at least two of four other states: Alaska, Iowa, Ohio, and Texas. Trump won these four states in 2024 by double-digit margins.

Although Democratic candidates have raised more money nationwide than their Republican opponents, the Republican National Committee and GOP-aligned super PACs have raised much more than their Democratic counterparts. Trump’s own super PAC has $400 million in campaign funds.

"Democrats will win the national popular vote. That’s not in question," said Democratic strategist Jesse Ferguson. "The question is whether these structural impediments will keep them from winning a Senate or House majority."

Led by Trump, Republicans have sought to paint Democrats as socialists or even communists, using Michigan progressive Democratic Senate nominee Abdul El-Sayed as an example.

"This is the year of ‘showing a contrast to America,’" said Speaker of the House Mike Johnson, echoing the "Contract with America" campaign Republicans pushed in the 1994 midterm elections. "It’s a contrast between common sense and insanity."

With widespread public dissatisfaction over the cost of living, it remains to be seen whether these attacks will be effective. Notably, some high-profile Senate races are in states perhaps deeply affected by certain Trump policies.

In Iowa, farmers are hit by rising energy costs and Trump’s tariff policies; in Texas, cattle ranchers are angry about his removal of import duties on foreign beef. Michigan and Maine may feel the effects of the escalating trade war between Trump and both neighboring Canada and top trading partner China.

This week, the Republican Party will hold an unusual midterm convention. Party officials hope the event can re-energize the base and remind voters of Trump’s tax cuts and other achievements. However, the convention will focus heavily on Trump, who will speak at both major evening sessions—possibly backfiring by closely tying vulnerable GOP candidates to the president.

While cost of living burdens and the war are top issues, many campaigns will also focus on healthcare, Israel’s war in Gaza, and significant community debates over data centers’ extreme electricity and water use.

There are still eight weeks to go until Election Day. Given Trump’s almost daily ability to shift the focus of political discussion, this is a long time. However, analysts say it may be too late for Republicans to change voters' negative perceptions of the economy.

"Can Republicans further energize the electorate?" asked Kyle Kondik, an election analyst at the University of Virginia Center for Politics. "It’s also possible that support won’t rebound and Trump’s declining approval simply can’t be reversed. For me, that’s the biggest question in this election."

Bank of America’s midterm election trading framework: Policy scenarios affect valuation and sentiment, real cash flow and revenue test AI investment returns

The Bank of America strategy team led by Hartnett previously connected “Republican hold on the Senate, Abbott holding the Texas governorship” with its so-called “bubbly 2027” scenario in its August 14 research report, and warned that the opposite scenario could mean a drop of over 10% for U.S. stocks. BofA said at the time, “If Trump can hold the Senate and Abbott can hold Texas, then we expect the stock market—especially AI-related semiconductor stocks—to soar all the way and push the market toward a potentially very frothy 2027 (Hartnett refers to ‘bubbly 2027’).” However, if Democrats win the Senate and defeat Abbott, the U.S. stock market could see a drop of more than 10%, with the dollar and bond yields also falling sharply before the end of the year.

Midterm elections serve more as a “valuation and risk premium toggle” for the global semiconductor super bull, rather than the engine that determines AI demand itself. Therefore, according to the BofA strategists, elections can alter policy expectations and valuations, while Token orders and internal cash flow provide the test for actual returns on global AI computing resource investments and the sustainability of AI capital expenditures.

Hartnett and his team’s strategic and investment approach is very clear: If Republicans hold the Senate and Greg Abbott keeps Texas, the market will interpret this as continued favorable policy for AI data centers, energy infrastructure, tax, and business regulatory environment—especially as Texas already has 335 data centers with another 247 planned projects—which reduces the “tail risk” of AI CapEx (i.e., AI capital expenditure) facing political constraints driven by electricity, grid pressure, and voter backlash.

BofA’s research last Friday listed three Congressional control scenarios: Democratic control of both chambers equates to risk assets under pressure, dollar and bond yields down; Republican control of both means risk appetite expands; Republican Senate and Democratic House is described as the mildly risk-friendly “stalemate Goldilocks” scenario.

BofA stated that if Democrats sweep both chambers in the midterms, U.S. stocks face a drop of over 10%, the dollar weakens, bond yields fall, and the risk of an AI bubble burst increases. Hartnett’s team identified "Democratic sweep of Congress" as one of the biggest tail risks in the current market, and investors have barely priced it in. Conversely, if Republicans unexpectedly hold both chambers, it signals a rebound in risk appetite, a green light for the AI bubble, and a renewal of dollar and U.S. market exceptionalism narratives. The “Republican-controlled Senate, Democratic-controlled House” scenario, currently seen as most probable, aligns with the mildest, most market-friendly risk appetite—“stalemate is Goldilocks.”

BofA cited a recent fund manager survey showing that 47% of respondents expect the outcome to be “Republican Senate, Democratic House,” 23% expect a Democratic sweep, and only 9% expect Republicans to control both chambers. Republicans currently lead 53 to 47 in the Senate and 218 to 212 in the House.