Bianca Botes, Managing Director at Citadel Global
The Democratic sweep of both chambers of United States (US) Congress on 3 November produced two of the most volatile sessions of the year in successive days. On Wednesday the Dow Jones Industrial Average gained 1,569 points or 3.03%, its best post-midterm day since 1982 according to financial intelligence solutions firm, CFRA Research, while the S&P 500 added 1.58% and the NASDAQ Composite 1.44%. By Thursday evening, at the time of writing, that rally had been reversed in full, led by a sharp decline in semiconductor stocks and the Chicago Board Options Exchange (CBOE) Volatility Index (VIX) had recorded its largest one-day jump in more than two years. Oil followed a similar path, but in the opposite direction, falling 8.3% on Wednesday before recovering part of the loss on Thursday.
The size of the swings is striking because the election result, itself, was widely expected. Prediction markets such as Kalshi and Polymarket were good indicators of the markets’ expectations. These prediction markets allow people to buy contracts that pay out $1 if an event occurs, the contracts are priced at the probability of an event happening, so a contract trading at 75 cents implies a 75% probability. Going into the vote, those prices gave Democrats roughly a 94% chance of winning the House and a 75% chance of taking both chambers. While the outcome was anticipated, the market’s response to it was not and two days of trading have now produced two different interpretations of that result.
The two interpretations of a democratic win
The first interpretation, on Wednesday, separated the companies supplying the artificial intelligence (AI) build-out from the companies paying for it. Investors expect a Democratic Congress, together with candidates opposed to data centre expansion, like the candidates who won in Texas, to slow new construction. That was read as negative for AI infrastructure suppliers, with CoreWeave down 9.9% and IREN 11.2%, but positive for the largest AI platforms, since a slower build-out makes their existing capacity scarcer and eases pressure on capital spending that has risen to more than $740 billion this year from around $400 billion last year, increasingly funded by borrowing. Amazon gained 7.4% and Microsoft close to 7% and on Wednesday, Reuters estimated that the five largest technology companies were on course to add more than $750 billion in combined market value in a single trading session.
The second interpretation came on Thursday, as markets recognised that the two sides of that trade are the same income stream. Capital spending by the platforms is revenue for the chipmakers and the earnings growth that has justified technology valuations through 2026 depends on that spending continuing to rise. Prominent Wall Street technology analyst, Dan Ives, brought forward his expectation that Big Tech capital spending growth will now peak earlier, in 2027, citing the political map, Texas in particular. This statement saw selling that began in chip names like AMD, Micron, Broadcom and Nvidia and spread to the platforms that had led Wednesday’s gains as investors moved towards consumer, healthcare and financial stocks. The relief that capital spending might be contained lasted a single session before the market priced what containment means for the companies whose revenue stream it is hurting, resulting in a severe selloff of AI, chip and data-centre infrastructure stocks, that wiped out trillions in market value.
Treasury yields rallied
Bonds, post-election, have been more consistent. Treasuries rallied on both days, taking the 10-year Treasury yield to around 4.85% and the two-year lower still, as investors concluded that divided government makes further fiscal expansion harder to pass, a view multinational banks, UBS and Deutsche Bank, both expressed and as equity volatility added demand for safety. As such, the gold price rose on both days. Expectations of tariff relief and the inherent inflation impact, should be more restrained, however, because Democrats lack the two-thirds majority needed to override a veto and the duties still in place rest on Section 232 and 301 authority, which the president already holds.
Oil plummets on optimism, alone
Oil shows the post-election assumptions being made most clearly with nothing having changed in the physical market on Wednesday, no US-Iran ceasefire was announced, no agreement was signed and a senior Iranian official said that substantial gaps remain in negotiations. What changed, however, was the political reading of the war, after US President Donald Trump attributed the Republican losses to the price of gasoline and US Vice President JD Vance named the conflict as the reason for the defeat. The market inferred that an administration which had lost Congress over fuel prices would now seek an exit from the war and priced in that exit within one session. On Thursday prices recovered on doubts over whether the administration will pursue a deal at all, which is the same uncertainty that existed before the vote and markets priced in a reverse.
An ongoing theme
Last week we argued, using Brazil’s runoff and the rally that followed South African President, Cyril Ramaphosa’s rise in 2018, that markets, riskily, priced in the destination of a political event without allowing for the length of the journey. This week compressed that lesson into 48 hours. Prediction markets were right about the result, investors were right about the direction of policy and positioning was still caught out twice, because neither a contained AI build-out nor a negotiated peace deal has happened yet and both carry consequences that take quarters rather than sessions to show up in earnings or barrels of oil. For clients with dollar, energy or technology exposure, the protection that counts is the one put in place on the evidence of what has actually happened, not on the market’s first reading of what an outcome is likely to mean.
ENDS
