by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment opens with our thoughts on the role that state governors could play in curbing the AI buildout. We then turn to national security, examining why the president might shift more attention abroad now that the midterms are over. Next, we briefly cover Moscow’s deepening ties with Iran, as well as the two Senate races that remain unresolved. As always, we conclude with a review of recent domestic and international economic data.

Governors and Data Centers: While financial markets have focused heavily on shifting power in Congress, changes in state governorships could prove just as consequential. Following the midterm elections, Democrats picked up five additional gubernatorial seats, bringing their total to 28. This shift comes at a time when local communities are pressing state governments to regulate data centers over concerns about their strain on public utilities. The change in party control has raised worries that stricter regulations may follow.

• While two gubernatorial races remain unresolved, Democrats are set to hold a majority of governorships for the first time in 16 years. The two contests up for grabs are in Kansas and Alaska, with the former leaning toward a Democratic victory and the latter heading toward a ranked-choice tabulation. Much of the party’s strong performance was driven by promises to address the rapid construction of data centers, a key issue that fueled Democratic wins in Texas, Ohio, and Georgia.
• Data centers had become a major issue in the months leading up to the midterms. Earlier this year, Maine’s legislature passed the first statewide moratorium on new large data centers, but the governor vetoed it, leaving New York as the first state to impose one. These pauses are designed to allow time to study the facilities’ impacts. Several other states, including Texas, which has one of the largest concentrations of data centers, have pursued similar measures.
• Even with the gains for Democrats in several gubernatorial races, the implications for data centers remain unclear, as moratoriums vary in scope from state to state. For example, Maine’s proposed moratorium would have had limited exceptions, while New York’s targets only new large data center construction, excluding projects already in the works. This variance suggests that while some construction may be paused, a moratorium does not necessarily mean an outright end to projects.
• Time will tell how Democrats will approach data centers, especially since the facilities have been a major engine of economic growth. Additional restrictions or moratoriums would likely act as a headwind to investment spending, at least in the near term. However, they are unlikely to end the spending spree altogether. That could change if restrictions raise project costs to the point where data centers become unprofitable, although there is currently no evidence that this is the case.

National Security Pivot: With the midterm elections concluded and opposition majorities set to control both houses of Congress, the president is expected to shift focus toward international affairs. Constrained domestically, his administration is likely to prioritize high-stakes foreign policy objectives: resolving conflicts in Ukraine and Iran and finalizing a trade deal with China. While such second-term pivots are common, the geopolitical stakes make this transition unusually high-impact.

• Following the midterm results, the White House will likely face tighter constraints on its authority. Having campaigned on rolling back key initiatives from the president’s first two years, Democrats are expected to target immigration enforcement policies and social benefit cuts. The administration’s judicial appointments could encounter fierce resistance as opposition lawmakers move to block further court stackings. Congressional investigations into several White House officials are also widely expected.
• Although Democrats may attempt to check executive power abroad, foreign policy remains a key arena where the Trump administration retains broad latitude. Presidents hold significant constitutional and statutory authority over national security, including limited military actions, trade negotiations, and tariff enforcement. These unilateral powers afford the president a critical avenue to define his foreign policy legacy despite legislative gridlock at home.
• Despite the president’s authority, the next two years of his foreign policy may be less disruptive to markets than the previous two. With the exception of his stance toward Europe, he is likely to take a lighter touch than before as he seeks to secure lasting deals. He has already signaled that he wants diplomacy to work regarding a deal with Iran, made strides to soften the US stance toward Moscow to help resolve the conflict in Ukraine, and appears set to establish a framework for a trade deal with China.
• The Democratic takeover of Congress may shift political volatility away from foreign policy and toward domestic issues as lawmakers gear up for the next election cycle. With a divided government, the White House could ramp up battles over the national deficit while dialing back more extreme foreign policy moves to win back moderate voters. If so, the next year should see more stable energy markets, providing a favorable backdrop for risk assets.

Moscow Deepens Ties: Over the last few years, Russia has provided continuous military support to Iran. A new report states that Moscow has agreed to supply Tehran with 90 missile launchers, despite facing ongoing setbacks in its war with Ukraine. While the delivery is not expected to be a game changer on the battlefield, the move suggests that the two conflicts are becoming increasingly intertwined. Russia and China’s involvement in Iran is expected to be a key topic of discussion when the parties meet at the ASEAN conference later this month.

Senate Races: Two US Senate races remain too close to call, with Democrats holding narrow leads in both Mississippi and Alaska. The Alaska contest, where the margin is roughly 700 votes, faces intense scrutiny following allegations that the race was influenced by an independent candidate who shares a name with Republican incumbent Dan Sullivan.

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