Warnings have emerged regarding the Republicans in the midterm elections, while the AI bull market faces a "voter pressure test": Are we heading towards "bubble 2027" or a collapse in valuations?

From August 28 to 31, a Reuters/Ipsos poll showed that 47% of registered voters in the U.S. consider the cost of living to be the most important factor in their decision for the midterm elections, and 71% of American adults disapprove of Trump's handling of the cost of living issue; during the same period, due to high energy costs and inflation resurgence, only 33% of respondents approved of his overall governance performance. These are preliminary polling results by the media and cannot be directly converted into congressional seats or election win rates, but they significantly indicate that energy prices and the burden of consumer spending have become policy backgrounds that must be addressed. Congressional control, which is to say the control over both houses of Congress and its impact on financial markets, first manifests in legislation, government support and funding for large investment projects, investigations, and personnel appointments. Notably, the Republicans maintaining control over the Senate and Abbott winning the Texas gubernatorial election is crucial for the investment outlook of the global AI computing power industry chain and the valuation trajectory of core computing targets. Profit expansion continues to support the AI bull market, but long-term yield rates and policy reevaluations triggered by the election are threatening the valuation foundation of this market rally. However, the midterm elections do not involve the presidential election; even if the control of Congress changes, significant tax law adjustments still require legislative procedures, and the president retains veto power, which requires a two-thirds majority in both houses to override. Therefore, "changes in congressional control" cannot be directly equated to an immediate reversal of Trumps pro-business tax policies, a comprehensive tightening of regulations, or the stalling of the multi-trillion-dollar AI data center investment processes due to party pressures. The constraints faced by data center construction have already become more defined. On August 3, Texas Governor Abbott called for a comprehensive review of data centers seeking to connect to the Texas grid, and projects may not proceed until the review is complete. The state government disclosed that the new electricity demand involved in the interconnection applications exceeded 474 gigawatts, with nearly 90% coming from data centers; these are application scales, not the already operational load or confirmed orders. The review will cover electricity usage, water usage, financial incentives, and community impacts, which indicates that bipartisan debates about the cost of living closely tied to the midterm elections can transmit through interconnection conditions and project timelines to AI infrastructure investment. A research report from Michael Hartnett, a senior strategist at Bank of America known as "Wall Street's Most Accurate Strategist," and his team incorporates U.S. policy conditions and funding costs into the valuation analysis of AI computing power themes: if the Republicans fail to win the Senate and consecutively lose both the Senate and House, project approvals will be prolonged, delaying the launch of computing power and the actual revenue and profit generation from AI; Democratic control of Congress would lead to increased financing rates, raising data center construction costs and reducing the present value of future cash flows. According to this valuation framework, companies dominating the global semiconductor and data center power chain and the "new cloud" posing as AI computing power leasing firms are bound to be affected by negative expectations, ultimately verified through actual orders, deployment rhythms, capital expenditures, and free cash flows. This sell-off pressure could first manifest as a contraction in valuations of AI-related stocks; if approval and financing constraints lead cloud providers to further delay construction and equipment procurement, the impact will then propagate through the industry chain to affect supplier orders, revenues, and operator cash flows, pushing policy concerns further into profit pressure. Hartnett considers the Democratic control of both congressional chambers as an important pressure scenario: increased market worries over higher tax burdens, stricter regulations, and restrictions on AI development, with corporate profit expectations and valuations simultaneously under pressure; based on this, he suggested a combination of asset prices where U.S. stocks could fall by over 10%, the dollar weakens, and bond yields decline. In contrast, he views Republican control of both chambers as a risk appetite expansion scenario and describes a Republican-controlled Senate coupled with a Democratic-controlled House as a mild "standoff golden girl" favorable to risk assets. As the midterm elections enter their final sprint, warning signs emerge for the Trump-led Republicans. With Labor Day approaching on Monday, the unofficial final sprint of the campaign begins. Just two months before the midterm elections in November, President Donald Trump's extremely low approval ratings are jeopardizing the Republican Party's chances of maintaining a slim majority in Congress. Election experts state that midterm elections function primarily as a referendum on the current occupant of the White House. This is particularly evident during the Trump era: he has been a dominant figure in U.S. politics for the past decade, and in the last two years of his term, he may face substantial political resistance. If the Democrats win a majority in the U.S. House of Representativeswhich seems quite likely at this pointthey will be able to launch investigations that could cause significant political damage to the Trump administration, while also compelling the White House to compromise on most legislative issues. Democratic leaders have vowed to investigate what they term Trumps corruption and misconduct. Analysts say that the battle for control of the U.S. Senate remains too tight to predict the outcome; however, if Democrats gain a majority in the Senate, they could obstruct many of Trump's personnel nominations, including Supreme Court nominations when vacancies arise. Although the Democrats face their own challenges, including ideological rifts between moderates and the left, Trump's unpopularity has become a political burden for the Republicans. The latest Reuters/Ipsos survey indicates that Trump's approval rating is at a historic low, with a vast majority of respondents expressing dissatisfaction with the Iran war and the economy. The gap between his disapproval and approval ratings is nearly double that of the same period in 2018, when the Democrats gained 40 seats in the House. Voter enthusiasm expressed by Democratic voters surpasses that of Republican voters, with recent special elections and primaries corroborating this finding, as registered voters show 5 percentage points more support for Democratic candidates compared to Republican candidates. Historical patterns also favor the Democrats. Since 1938, except for two midterm elections, the party of the incumbent president has lost House seats in every other midterm election. "I think people generally feel the president isnt focusing on the issues most concerning to voters, which is whether living expenses are affordable," said Jessica Taylor, a Senate election analyst for the Cook Political Report. "If you want to express dissatisfaction with the president during the midterm elections, the only way to do that is to vote against his party." However, the Democrats also face their own challenges. In a series of primary contests, progressive candidates actively challenging establishment figures, including Democratic socialists, unexpectedly defeated centrist candidates backed by the establishment, raising questions about the party's leadership, campaign messaging, and internal unity. The Republican Party still maintains several structural advantages. Currently, the Republicans hold a slim lead in the House, with 218 seats to 214. After winning a historic redistricting battle occurring in the middle of the ten-year cycle, the party could gain an additional net gain of up to 10 seats simply from the newly defined districts. All 435 House seats, along with about one-third of the 100 Senate seats, will be contested on Election Day, November 3. Meanwhile, the electoral map in the Senate is less favorable for the Democrats. Even if they win tough contests in Georgia, Maine, Michigan, and North Carolina, they would still need to secure wins in at least two out of four other states: Alaska, Iowa, Ohio, and Texas, where Trump won in 2024 by double-digit margins. Despite the national fundraising numbers favoring Democratic candidates over Republican opponents, the Republican National Committee and super PACs supporting the Republicans have far outpaced their Democratic counterparts in fundraising. Trumps own super PAC has $400 million in campaign funds. "Theres no doubt that the Democrats will win the overall national popular vote," said Democratic strategist Jesse Ferguson. "The question is whether these structural obstacles will prevent them from winning a majority in the Senate or the House." Under Trump's leadership, Republicans have continually attempted to portray the Democrats as socialists, even communists, using progressive Democratic senator nominee Abdul El-Sayed from Michigan as an example. "This year is a year to 'show America the contrast,'" House Speaker Mike Johnson stated, echoing the Republican platform of the "Contract with America" proposed during the 1994 midterm elections. "Its the contrast between common sense and madness." In a backdrop where voters are largely dissatisfied with the burden of living costs, it remains unclear whether these attacks will be effective. Especially in several states with highly-watched Senate races, the impacts of some of Trumps policies may be particularly significant. In Iowa, farmers are affected by rising energy costs and Trump's tariff policies; Texas ranchers are angry over his decision to lift tariffs on imported beef. Michigan and Maine may be impacted by the escalating trade wars with neighboring Canada and the U.S.s largest trading partner, China. The Republican Party is set to hold an unusual midterm election rally this week. Party officials hope this event can reignite enthusiasm among its base while reminding voters of the tax cuts and other achievements implemented by Trump. However, the rally will heavily focus on Trump, who will speak at both evening sessions; this may backfire by tightly linking vulnerable Republican candidates to the president. While the cost of living and wars are the primary issues, many campaigns will also focus on healthcare, the Israeli war in Gaza, and the significant community debates surrounding the extreme electricity and water consumption of data centers. There are still eight weeks until Election Day. Given Trumps unique ability to shift the political discussion almost daily, this period is noticeably lengthy. However, analysts suggest that if the Republicans intend to alter voters' negative perceptions of the economy, they may already be too late. "Can the Republicans further boost voter enthusiasm?" asked Kyle Kondik, an election expert at the University of Virginia's Center for Politics. "Another possibility is that support won't rebound, and the decline in Trump's approval will be irreversible. To me, that's the biggest question of this election." Bank of Americas midterm election trading framework: Policy scenarios affect valuations and sentiments, and real cash flows and revenues validate AI investment returns. Hartnetts team at Bank of America previously linked "the Republicans holding onto the Senate and Abbott retaining the Texas governorship" with their so-called "bubble 2027" scenario in a research report published on August 14, suggesting pressure scenarios where U.S. stocks could fall over 10%. Bank of America stated at the time that "if Trump can hold the Senate and Abbott can maintain Texas, then stock marketsespecially AI-related semiconductor stockswill soar, pushing the market toward a potentially bubble-like 2027 (Hartnett referred to "bubbly 2027")." However, if the Democrats take the Senate and defeat Abbott, U.S. stocks will face a "significant drop" of at least over 10%, while the dollar and bond yields are also expected to decline significantly before year-end. The midterm elections may serve more as a "valuation and risk premium switch" for the global semiconductor super bull market, rather than being the engine that drives AI demand itself. Therefore, from the perspective of the Bank of America strategists, the elections can alter policy expectations and valuations, while token orders and internal cash flows are used to validate the actual investment returns in global AI computing resources and the sustainability of AI capital expenditures. Hartnett and his teams strategy and investment logic are very clear: if the Republicans hold the Senate and Greg Abbott retains Texas, the market will interpret this as a continued friendly environment for AI data centers, energy infrastructure, and commercial tax and regulatory conditionsespecially given that Texas already has 335 data centers and 247 planned projects, significantly reducing the market's tail risk regarding "electric prices, grid pressures, and voter backlash eventually forcing AI CapEx (AI capital expenditures) to be subject to political constraints." Last Fridays research report from Bank of America outlined three possible congressional control combinations: they categorized Democratic control of both chambers with risk assets under pressure, the dollar and bond yields declining, while Republican control of both chambers yields an expansion of risk appetite. They depicted the scenario of the Republicans controlling the Senate and the Democrats controlling the House as a mild "standoff golden girl" situation conducive to risk assets. Bank of America stated that if the Democrats sweep both chambers in the midterm elections, U.S. stocks will face a decline of over 10%, the dollar will weaken, and bond yields will drop, while an AI bubble would be at risk of bursting. Hartnett and his Bank of America strategist team qualify the "Democratic sweep of Congress" as one of the biggest tail risks currently facing the market, against which investors have not priced in much at all. Conversely, if the Republicans unexpectedly hold both houses, it would signify a comprehensive rebound in risk appetite and a green light for the AI bubble, while the narrative of dollar and U.S. market exceptionalism rekindles. The currently most likely scenario of "Republicans controlling the Senate and Democrats controlling the House" aligns with the mildest and most market-friendly risk preference"standoff is a golden girl." Bank of America cited a recent manager survey conducted by the institution, which indicated that 47% of respondents expect the outcome to be "Republicans controlling the Senate and Democrats controlling the House," 23% expect the Democrats to sweep, and only 9% anticipate the Republicans maintaining control over both chambers. Currently, the Republicans lead the Senate with a 53 to 47 advantage and the House with a 218 to 212 lead.