The dramatic Democratic sweep of Congress in the midterm elections may put another crimp on growth of one of the biggest market sectors in recent years: data centers.
“Nearly every major local ballot measure opposing data centers won or is winning,” J.P. Morgan Asset Management’s Michael Cembalest said following the rout of Republicans in this week’s elections. He said the only exception was in North Dakota.
“What we’re now watching: governor-imposed constraints on new builds,” said Cembalest, who is the chairman of market and investment strategy at J.P. Morgan’s Asset Management. He listed ten incumbent or incoming governors who’ve either put conditions on data centers or paused them entirely. The states affected include Texas, Ohio, Georgia, Iowa — all of whom flipped their governorships by electing Democrats — Pennsylvania, Illinois, Arizona, Oklahoma, Wyoming, and Oregon.
Texas has one of the biggest footprints of data centers, with almost 600 either in operation or planned. The state’s new governor-elect, Democrat Gina Hinojosa, made reining in data centers one of her main campaign promises. Even the current governor, Greg Abbott, whom she defeated, called for a moratorium on their construction. (Hinojosa also wants an end to data centers’ tax breaks.)
Cembalest predicted that the changes shouldn’t affect the 37 gigawatts expected to be delivered in 2027, 75 percent of which is under construction.
The J.P. Morgan strategist thinks the changes will become more of an issue for 2028, when 96 gigawatts are expected to come online. “Based on election results, 37.5 GW may be subject to a ‘pause,’ with another 15 GW subject to ‘conditions,’” he noted. Pauses may seem more “impactful,” he said, but conditions themselves can be onerous. States may end tax incentives, impose water limits, set requirements for onsite backup power, mandate labor requirements, ban non-disclosure agreements during permitting, and require data centers to pay grid costs to protect ratepayers.
Post-election, the neoclouds involved in data centers are tumbling in the stock market. CoreWeave, the heavily indebted neocloud that has come under the most scrutiny, fell more than 9 percent Wednesday. In recent weeks the yields on its debt spiked, and prices of its credit default swaps have widened. Shares of rival Nebius fell some 6 percent.
Data centers are a big part of the AI trade that has dominated the stock market in recent years and is now showing weakness. Cembalest said that the recent AI market selloff appears influenced by a heavy bout of hedge fund profit-taking. He noted that gross long-short hedge fund exposure has fallen by 8 percent from its recent peak, the largest drawdown since 2016.
There are also more questions being raised about the off-balance sheet liabilities surrounding the AI buildout. There is currently some $4 trillion in off balance sheet obligations for the big seven AI companies, according to J.P. Morgan, adding that only 15 percent of their debt and lease commitments appear on their balance sheets. “That may explain why their credit spreads have been widening rapidly,” Cembalest said.
“Markets are also suspicious of the AI earnings boom,” he added, noting that P/E multiples divided by projected earnings growth have fallen more for the big seven AI firms than for other sectors.
