Midterm elections could become a hidden concern for US stocks! Wall Street scenario analysis: If Democrats control at least one chamber of Congress, the AI sector would be the first to bear the brunt.

The US midterm elections are becoming a major hidden concern for the US stock market, which is currently riding high on the AI boom. In recent weeks, polls and prediction markets have tilted heavily toward Democrats, who are now increasingly favored to control at least one chamber of Congress. Wall Street strategists believe that if this scenario materializes, stocks that have benefited from the AI frenzygenerally trading at elevated valuations with very little margin for errorcould come under pressure, as the incoming Congress may launch investigations, hold hearings, and even introduce stricter regulatory rules. Brian Mulberry, chief market strategist at Zacks Investment Management, said that if Democrats perform strongly in the November elections, hearings on AI safety issues will "not only increase in number but also in intensity." Mulberry believes that as headlines from Washington make traders worry about congressional action, this will send AI trades into turbulence. It is understood that Democratic leaders have been preparing to investigate companies linked to the Trump administration and his family. In addition, a group of Democratic senators reportedly urged Trump on Wednesday to reach an agreement with China to mutually slow or pause AI research and development. Tobin Marcus of Wolfe Research wrote in a note to clients last week that the recent surge in concerns about the potential risks of AI systems has made safety issues "a more realistic topic for Congress in 2027." The policy-focused strategist expects Democrats to establish a "select committee on AI," summon industry executives for questioning, and possibly even issue subpoenas. Market observers have long flagged this risk. Last month, Michael Hartnett of Bank of America Corp warned that if Democrats sweep the House and Senateplus win Texasit could trigger a 10% drop in US stocks, citing potential policy shocks to AI-related sectors. Strategists at Barclays led by Jenny Yang and Alex Altmann said AI infrastructure and data center construction could face stricter scrutiny, a risk the market has "partly overlooked." As the possibility of congressional investigations rises, strategists at Evercore ISI led by Sarah Bianchi wrote in a report published Tuesday that "the broadest market risk comes from investigations and hearings on industry-related issues, especially in big tech/AI." These strategists are particularly focused on whether investigations will disclose new information about AI agents going out of control, or internal corporate communications acknowledging AI safety hazards. However, AI is just one item on Wall Street's long list of expected investigations. Evercore ISI believes the number of follow-up investigations could be so large that investors will struggle to track them all. The firm also expects Congress to investigate industries related to cost-of-living issues that voters care deeply about, including energy, healthcare, food and agriculture. Strategists have also previously warned that companies in which the US government holds equity stakes (such as Intel Corporation (INTC.US)) could also face risks. Of course, even if Democrats win both chambers, Trump can still exercise veto power, making it nearly impossible for relevant bills to become law without his support. Trump is now a supporter of the AI industry and has repeatedly rejected calls to impose restrictions on data center construction or slow the development of advanced models. So far, investors have largely shrugged off concerns stemming from various regulatory calls. After a period of turbulence, the Philadelphia Semiconductor Index is up 5.1% so far this week, and the tech-heavy Nasdaq 100 Index on Tuesday hit a record high for the first time since June. But the market is far from being out of the woods. Beyond holding hearings, committees can also propose legislation. If a so-called "blue wave" materializes in Novemberas prediction markets suggestUS stocks could take a hit as investors begin pricing in greater policy risks after the 2028 election, especially those related to higher corporate taxes and AI regulation. Scott Chronert, head of US equity strategy at Citi, wrote in a note to clients this week that if Democrats sweep both chambers of Congress, key committees will fall into Democratic hands. "We view this as a modest negative for AI trades and sectors that have previously benefited from regulatory easing. Over the next two years, a batch of market-unfriendly bills will be sent to Trump's desk awaiting veto; once that happens, a large backlog of policy proposals will accumulate and could be rapidly advanced after 2028."