Why Wall Street is watching governor races
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Billions of dollars in planned data center construction hang in the balance as the midterms approach — and investors are closely watching a few key races in states where projects are planned but construction has not yet started.
Why it matters: If elections don't go Wall Street's way, you could see restrictions that disrupt key projects and, more broadly, rattle the AI trade currently driving the stock market and helping power the U.S. economy.
Zoom in: Wall Street firms are tracking races closely, down to the makeup of local utility commission boards.
- "Investors are trying to interrogate this and really understand every single corner of this issue," says Ariana Salvatore, head of U.S. public policy research at Morgan Stanley.
While a backlash is evident throughout the country, it is most meaningful in states and localities where a few factors intersect:
- Places where a lot of construction is planned, plus there's a competitive statewide race where candidates have a divergence of views on the issue, says Maxwell Shulman, a research analyst at consulting firm Beacon Policy Advisors.
Between the lines: It's the governor races that you want to keep an eye on, says Morgan Stanley's Salvatore. State leaders have the most explicit and tangible power over building.
Texas, where 25% of planned data center build is located, is the state to watch.
- Democrat Gina Hinojosa is challenging Republican Gov. Greg Abbott. She supports a moratorium on new data centers until tougher rules are established. He has imposed a limited pause on permits — critics have documented permits still moving forward.
- "I'd say Texas is No. 1," Shulman says.
By the numbers: The results of 10 governors' races will help set the rules for 67.4 gigawatts of planned data centers — $2.5 trillion of AI infrastructure investment — according to an October analysis from research firm Cleanview.
- That's more capacity than is currently operating in the U.S.
Follow the money: The risks to investors are idiosyncratic — new restrictions on a project that hasn't yet broken ground, say, that then lead to delays, putting loans or bonds at risk.
- Yet slower AI construction could reduce borrowing needs and help the credit markets by siphoning off some supply, Morgan Stanley notes.
- For the hyperscalers, a harsher regulatory landscape will mean they'll have to run around the country putting out political fires. But broadly speaking, they'll be OK.
- It's the smaller AI players that are more at risk — particularly the neoclouds that are already seeing higher costs and investor pullback.
The clean energy sector is also watching. The data center buildout is "creating a lot of demand for the services that companies we invest in can provide," says Brandon Hurlbut, co-founder of Overture VC, a climate tech investment fund.
- If there is a slowdown, he says, some of that would dissipate.
What to watch: A midterm Democratic sweep, particularly alongside victories for anti-data center challengers at the state and local level, would be the most negative for AI investor sentiment, Morgan Stanley projects.
Reality check: Even that wouldn't necessarily mean a broad stock sell-off or an end to AI spending.
- "The capex narrative is still intact," Salvatore says.
