‘Category 5 Hurricane’ For Data Centers: How Midterm Results Are Rocking The AI Trade — IBD

[00:00:00] Speaker 1: A blue wave has swept Capitol Hill with Democrats taking control of both the Senate and the House. While Wall Street often cheers legislative gridlock, A Divided Washington raises immediate questions for investors, especially around the future of the AI trade. And here with me to break down the results is Ed Mills, Washington policy analyst and a managing director at Raymond James. Ed, it's great to have you here and get your take on all of this. So what is your immediate read on the outcome here? [00:00:32] Ed Mills: Yeah, Alexis, this was a blue tsunami. And if you look at the AI trade, the thing that I've been watching closest is the governor's race in Texas. And to use a different storm analogy, this is arguably a category five hurricane that hit the data center trade because you have a candidate that has won who said that the old moratorium was a scam and that if elected, she would put in place a real moratorium. Now that's just Texas, but you also have a similar thing in Ohio. You have a governor just reelected, say, in Pennsylvania who might be running for president in 2028. And so the way I look at this is that a politician, his or her currency is the ability to win elections. And if the takeaway from this election is that Democrats were able to win in historically Republican areas, partly because of their opposition to data centers, as we enter the 2028 presidential election, this is going to become an AI election. [00:01:30] Speaker 1: Let's drill down more into that then. So for investors looking at this, how seriously does this local pushback threaten that capital deployment? [00:01:41] Ed Mills: I think it could significantly threaten that capital deployment. And the reason is it's not about data centers themselves. It's about what they represent. It's about what they represent. And I kind of feel as if the AI industry's motto out there right now is we might take your job or we're going to end the world. And politically, that's a very difficult place to be. And in a lot of these conversations, you see as much as 75% of the American people opposed to data centers. And it's not just because of affordability. It's not just because of environmental issues. It is the physical manifestation related to a lot of anxieties all wrapped up into one. And so in politics, you love these issues if you're running and you're on the side of the ability to point to something that captures a lot that allows you to define your candidacy and define your opposition. And if there truly is going to be more moratoriums than we thought, then it's possible that the CapEx in this space has already topped out. And some of the deployment of new energy resources that's been expected might not come to fruition. [00:02:53] Speaker 1: And when it comes to, you know, looking at potential, I guess, winners here, if any, do you view the cloud hyperscalers like Microsoft, Amazon, Google, Meta, or are they winners in an environment where it does become trickier to build? [00:03:12] Ed Mills: So Alexis, I think this is really an interesting question because, uh, the pushback I get sometimes is, oh, this is about regulatory capture. And in DC, in, you know, in the banking space, we've always talked about too big to fail. Well, are we going to create a regulatory environment where there's too small to comply? You have an industry that is literally spending trillions of dollars to deploy kind of their technology and they don't have a moat. You wake up one day and you get an announcement out of China about DeepSeq or the Kimike 3 model. And there can be immediately a top five model. You look at the market share gains of the open source models coming out of China and you have an industry that says, oh, we need to get DC on board to develop us this moat so that our competition doesn't have as easy of a time. And if they can keep their market share longer term, they get to be the big winner. [00:04:09] Speaker 1: So when it comes to neoclouds then, are we looking at that, I guess, what is it, guppy level extinction event here? Or how concerned are you with that, um, portion of the sector? [00:04:21] Ed Mills: They absolutely could be in that too small to comply area. I guess another way I've described this, and this here is something that, you know, I believe that AI is going to be transformative. And I believe that there is going to be so many investments here that are going to be quite lucrative. But a fundamental thing that I always apply to DC policy risk on the market is that it's never as bad as you fear, nor as good as you hope. A great example, as bad as you fear, was some of the market reaction to the tariff announcements last year. But I look at this AI trade and I say, oh, I think we've been pricing in as good as it hopes because essentially right now at the federal level, there is no AI regulation. And with the election results and some of the pushback from constituencies around data centers and concerns about AI models, what you are going to go through is a transition into something else. And as we transition, I've been doing this job now for 15 plus years. I've been in DC for 25. When you go through those transitions, you have huge periods of volatility because that volatility is driven by the uncertainty. And so we had a blue wave. We're going to have a presidential election. We could have an event that triggers a response from Congress. All of those things now need to be priced in. [00:05:40] Speaker 1: And talking about that response from Congress, I think that is one of the big questions on investors' mind is how this power shift is going to impact that broader buildout in terms of any future tech regulation. What are your thoughts there? And, you know, Trump still is everything has to get his sign off. So does the threat of an executive veto here basically make any new regulation moot at this point? [00:06:07] Ed Mills: Good question. I would put us kind of into two positions. So, you know, it's kind of thought number one is Democrats have leverage and there are some must pass pieces of legislation such as lifting the debt limit, funding the government. Are Democrats going to put a data center moratorium or kind of changes to the way in which data centers are funded, environmental, different kind of power costs and ratepayer protections? Are they going to put that in a must pass bill? And is Donald Trump going to shut down the government or kind of breach the debt limit? Not being in favor of some of those regulations. Number two, let's think about this. Say six months from now, we wake up and there is an AI event that we've all been warned about and we're all concerned about. And all of a sudden there is a crisis. So something that seems impossible today after that crisis moment could immediately become inevitable. And because Democrats have a solid majority that they're going into in the House and a much bigger majority than anyone thought in the Senate, they are going to control that pet. And so I think we have to think beyond, oh, Donald Trump's just going to veto this into recognizing that there is a much higher probability of legislation passing over these next two years and an exceptionally high probability that after his presidency, that the next president is probably signing legislation or implementing new regulation in the AI space. [00:07:47] Speaker 1: And I want to go back to Texas because that really was viewed as a bellwether here. I think very surprising to many people that it went so blue, just up and down the ballot there. So how serious are the political headwinds here? I'm thinking of major campuses like for SpaceX, XAI. You know, we see Elon Musk kind of being brought up in the mix here. What do you think here are some of the takeaways? [00:08:15] Ed Mills: Yeah, you look at some of the campaign spending and you understand why there was so much money spent on Texas. And something in politics is you usually don't see such one-sided spending because if you are in need of government support and regulatory approval, you probably want to make sure you have friends on both sides. For some of these hyperscalers, they could be waking up this morning and they're on the wrong side of these election results, which could add further doubt. I don't think everything gets canceled, but I do look at some of the voter pushback here. I've seen some community benefits agreements get signed and then a county council overturns them because some of the opposition here is visceral. The truism I have about D.C. is that in politics, when you're explaining you're losing, and I could go down the list of, oh, the water issue is solved because a lot of these are closed loop systems and they use sewage water and they replace it once a year. But for the voter, they're like, I don't want it. I don't care if you're using less water. I have this other issue. And then, well, we solved this. And they're like, I don't want that. And so the visceral reaction here, I think, can't be understated. And for a lot of voters, they just don't want these data centers. And if they don't want it and a politician is in favor of it or puts it in place, that politician probably does not get reelected. And I know that we're a day or so after an election, but for most kind of politicians, the next election is always just around the corner. [00:09:50] Speaker 1: And Ed, looking outside of the AI space, what specific sectors here stand to gain or lose the most momentum with the new balance of power? I think a lot of focus right now is on the prospect for more spending on health care. But what other sectors do you see moving on this? [00:10:07] Ed Mills: Yeah, so we polled our clients at Raymond James this morning. Immediate aftermath, we said, what are the best sectors? What are the worst sectors because of these outcomes? Overwhelmingly, they chose health care. They also chose consumer staples, you know, some consumer discretionary. And that is because they anticipate that Democrats will have leverage in some of these negotiations and that they will force the Republicans and President Trump to walk back some of the changes that were made under the reconciliation bill last year. Is there going to be a push to return some of the subsidies that went away when someone goes and purchases an insurance policy off of one of the Obamacare exchanges? Is there green energy provisions that are about what our investors at Raymond James told us was the worst performing sectors were likely to be information technology with the AI trade that we're talking about here and energy? Because I think there's also a sense that maybe the geopolitical situation changes. I guess I'm a little bit more skeptical of that. Let's see how Democrats use their leverage. Let's see what Republicans do in the lame duck. That will really tell you what the ultimate winner and loser of this election will be from a market perspective. [00:11:27] Speaker 1: Well, Ed, thank you so much for your insights today. We really appreciate it. [00:11:31] Ed Mills: Thank you. [00:11:38] Speaker ?: Thank you.