The widely predicted Big Tech and data centre backlash that helped propel Democrats to a midterm election victory has many wondering what's next for the AI sector.
From the start of President Donald Trump's second term, the White House has pushed policies that went against those of former president Joe Biden. The Trump administration said Mr Biden's approach "hinders AI innovation", and promised to "support AI development rooted in free speech and human flourishing”.
Mr Trump would routinely promote his relationships with technology executives who he would encourage to quickly develop and invest in AI, while promising limited regulation.
The White House also highlighted new deals that led to expedited data centre construction.
As a result, in the first two years of his second term, Mr Trump often claimed that his actions spurred trillions of dollars’ worth of investments and commitments by global Big Tech companies and investment majors.
But polls have shown American voters are frustrated with those technologies, with concerns over the environment, the spending involved and their distraction from the real issues such as inflation, high energy prices and the war in Iran.
“On AI, the Democrats may push to scale back tax incentives, shift more grid costs onto developers and introduce early safety regulations," Michael Strobaek, global chief investment officer of Switzerland's Lombard Odier, said in a note.
“The midterms will not alter the investment outlook, which we see as supportive for risk assets. Investors will refocus on monetary policy, economic growth and earnings. We keep a pro-risk stance in portfolios."
Not so fast
While Mr Trump will remain President, his final two years in office and his agenda face a bumpy road.
In a Wednesday post on X he issued a reminder that he still has veto power over congressional legislation.
Mr Strobaek anticipates any federal moratorium on data centres "would likely face an immediate veto".
Democrats in the Senate will now be more able to block any appointments from the Trump administration, especially of those focused on advancing the White House's AI and data centre agenda.
"The more likely outcome is two years of political confrontation, greater congressional oversight and legislative gridlock, rather than an immediate reversal of existing policies," Charu Chanana, chief investment strategist at Denmark's Saxo Bank, wrote in a note.
"Congress could increase oversight and restrict new incentives, but sweeping regulatory legislation would still face presidential veto risk."
Stock market hit?
AI-linked shares could be the most exposed to risk, a warning analysts issued before the elections, should the Democrats win. Billionaire Elon Musk, once a part of Mr Trump's government, after seeing Tesla Motors and SpaceX shares drop, joked on Wednesday that "data centres in space look pretty appealing now".
"Investors now see tougher scrutiny of Big Tech and data centres as more likely. They had already been under pressure in recent weeks, although lower yields could offer some support to valuations," said Manjeet Markanda, head of trade support at Lunaro Markets Ltd ADGM.
"Historically, US equities have tended to be higher a year after midterms, although the first weeks are often choppy. Past performance is not a reliable indicator of future results and volatility appears more likely than a clear trend."
Any greater regulatory scrutiny over AI would weigh on capital expenditures and associated inflows, which is an important source of US dollar support this year, noted David Meier, an economist at Swiss bank Julius Baer.
"Going forward, monetary policy and the AI investment cycle remain dominant drivers of the US dollar in the near term and should continue to provide support," he said.
"Over the longer horizon, however, we continue to expect US dollar weakness, reflecting the persistent US current account deficit and continuously strained fiscal position."
Technology executives react
Although technology executives and proponents of unregulated AI have been criticised in the US, they have largely avoided any significant regulation. But when the Democrats assume power in Congress, that will probably change.
So far, Nvidia's Jensen Huang, who in recent years showed support for Mr Trump, has not made any statement or reacted to the shift in power.
He has occasionally walked the halls of US Congress to win favour, but will now probably have more of a difficult time with Democrats.
On Tuesday, when the election results started to show victory for the Democratic Party, OpenAI chief executive Sam Altman posted an ambiguous comment about his company's AI philosophy.
"People should always be in control of the future," he wrote. "People should not cede control of the future to superintelligence, and that requirement should ultimately constrain AI progress."
Mr Musk, a major Republican donor and supporter of Mr Trump, joked about accusations of election interference.
"Guess my election-interfering space lasers didn’t work this time," he later posted.
Mr Musk is ultimately responsible for the construction of one of the biggest data centres in the US, in Shelby County, Tennessee.
It has caused controversy in the community and became a political issue that almost led to Democrat Justin Pearson winning a congressional seat in a heavily conservative district.
Although she has been less involved in US politics, AMD chief executive Lisa Su, whose company also is among one of the central figures of the AI boom said on Wednesday that the election results do not change her outlook on AI.
When asked if the company would curtail its sales projections related to data centre growth, she told CNBC that wasn’t going to happen.
"Whether you’re talking about the US, or you’re talking about across the world, there is an intense demand for more compute and we need to work together to make that happen," Ms Su said to CNBC's Jim Cramer.
What Democrats will do with AI and data centres
Most experts say that based on the Democratic Party's tendency in recent decades to be more critical of the private sector, the AI sector should prepare for increased regulation and scrutiny.
"The new Congress under Democratic control is more likely to take steps to protect ratepayers against paying the costs of AI data centres," said Mark MacCarthy, a senior fellow at the Institute for Technology Law and Policy at Georgetown University in Washington.
Mr MacCarthy, whose focus is anti-trust policy, said a bill introduced in the Senate that contains mandatory ratepayer protection for new data centres has largely stalled.
"Now that the House and Senate have flipped ... the ratepayer protections in this bill could be introduced as a free-standing bill and could provide a starting point for congressional action in the upcoming Congress," he said, emphasising the many Democrats who ran and won seats by showing opposition to data centres.
In January, when the new Congress is sworn in, Democrats will take control of several congressional committees overseeing cyber security, technology, innovation, space and commerce – all areas affecting AI.
Timothy Kneeland, a political scientist and public policy historian at Nazareth University in New York, says it would be risky for the Democrats not to apply regulatory pressure to the AI sector and Big Tech.
"The days of wine and roses for AI and data centres without regulation is over," he said.
Mr Kneeland said public sentiment has turned so far against technology companies that he suspects Republicans will assist the Democrats in having legislation passed, despite the threat of a veto by Mr Trump.
"Republicans could join with Democrats in overriding a presidential veto and the courts will thwart efforts to impose executive orders that violate the law."
Mr Kneeland said the concerns over AI were essentially about a stagnant US economy and slowing jobs market.
If applying pressure to technology companies makes it look like Democrats are fighting for average citizens, Mr Kneeland said they will probably keep doing that.
"Data centres and generative AI might lead to higher energy costs and replace workers, from the very highly skilled to those in more entry-level positions," he said.
"The Republican President and Congress refused to address these issues and instead wasted time on building monuments to the President or renaming geographic landmarks by executive order."
