The Biggest Trade If the Democrats Win Back the House and Senate in November's Mid-Term Elections: Short Artificial Intelligence (AI) Data Centers

Ready or not, the mid-term elections are now about six weeks away.

Although we probably say this every two years, this year seems like a big one, with some pivotal issues at play, including the Iran war, affordability issues, and everything surrounding artificial intelligence (AI). Although recent mid-term elections have shown how hard it is to predict outcomes, and polling seems less reliable these days, the Democrats have a strong chance of flipping both the U.S. House of Representatives and the Senate.

As of this writing, Polymarket places the odds of a Democratic sweep at 60%.

If the Democrats do sweep, I think the No. 1 trade would likely be to short sell AI data center companies, meaning investors would profit if their share prices fall. Here's why.

Image source: Getty Images.

Data centers are the low-hanging fruit of AI

Whether it was rogue agents from OpenAI hacking into Hugging Face or former Anthropic AI researcher Jacob Coxon warning the public that AI could lead to human extinction, there has certainly been a growing movement to regulate AI or install some kind of guardrails.

Historically, the government has been slow to regulate new technologies, such as ride-sharing, social media, or crypto. There is also a divide over AI regulation, as the U.S. doesn't want to fall behind other countries, such as China.

But AI is also moving faster than any technology ever has, so I do think a Democratic-controlled Congress could move more quickly to adopt regulations. The low-hanging fruit is likely data centers, which are key to powering AI and have become unpopular among the public.

Democrats have already taken action to ban or make it harder to build data centers. New York Governor Kathy Hochul instituted a statewide ban on data centers for up to one year in order to allow time for the state to implement a regulatory framework.

There have also been efforts in Congress to introduce legislation to slow the development of data centers.

Recently, Politico reported that a group of Democrats proposed a bill to prevent data centers from taking advantage of certain tax breaks, such as bonus depreciation or benefits from building in Opportunity Zones.

Bonus depreciation lets builders deduct significant depreciation costs upfront that would normally be spread over the asset's useful life, which can be many years.

Opportunity zones let developers reinvest capital gains in designated areas considered more economically stressed in exchange for significant tax breaks. These include deferring the payment of capital gains taxes.

Furthermore, if one of these investments in an opportunity zone is held for at least a decade, any subsequent capital gains are tax free.

A pair of Democrats from Virginia, U.S. Rep. Suhas Subramanyam and Sen. Mark Warner, have also recently sponsored legislation to further regulate data centers. Virginia has the most data centers in the country.

Among other provisions, the bill would require states to create a tax on data centers and other large users of power infrastructure, so data centers would essentially cover the cost of new infrastructure required to power them.

Which stocks are vulnerable?

AI is powered by data centers, so if the Democrats did manage to flip Congress and impose more regulations or restrictions on data centers, that could slow the entire sector.

For instance, Nvidia largely sells its graphics processing units (GPUs) for use in data centers. But the most directly affected stocks are likely pure-play data center companies, such as CoreWeave (NASDAQ: CRWV) and Nebius.

Furthermore, the hyperscalers such as Amazon and Alphabet are on pace to invest $1 trillion in AI infrastructure in 2025 and 2026, much of which has gone to build data centers. Still, these companies do have other tech businesses outside of AI.

Now, I'm not saying data centers are going away should the Democrats win Congress, but they are likely to face much more regulation, so if the Democrats do win, I expect the pure-play data center companies and hyperscalers to sell off, at least initially.

Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.