The political landscape in Texas is currently a focal point for the artificial intelligence (AI) trade, with investors and analysts closely watching the outcomes of the state's gubernatorial and Senate races ahead of the midterm elections. Incumbent Republican Governor Greg Abbott is vying for a fourth term against a formidable challenge from Democrat Gina Hinojosa and Libertarian Pat Dixon. Simultaneously, the Senate race sees Democrat James Talarico in a tight contest with Republican Ken Paxton.
Central to these elections is the future of data centers in Texas. Wells Fargo estimates that a significant 27% of the nation's data center gigawatts are located within the state. However, a recent University of Houston survey, polling 2,000 likely Texas voters from October 10-14 with a 2.19% margin of error, revealed that over 80% of residents are concerned about the impact of data centers on water supply and electricity prices.
Adding to the uncertainty, Governor Abbott imposed a halt on data-center permitting in September, emphasizing that 'Texans must come first.' The results of these elections could intensify pressure on an AI trade that has recently been struggling. The Nasdaq 100, for instance, has already entered correction territory this week, plummeting 10% from its peak last month.
Analysts are warning of a particularly bearish scenario. John Sonsalla, president at Washington Analysis, informed CNBC that 'The worrisome outcome here would be that not only does Talarico win the U.S. Senate seat, but you have Gina Hinojosa defeating Abbott. That's where the magnitude for the negative implication on the AI trade matters.' Julian Emanuel, a strategist at Evercore ISI, echoed this sentiment, noting that the 'AI Revolution's' health is tied to the Texas Governor's Race. He pointed out that while Abbott is expected to lift the Data Center Moratorium, Hinojosa would likely maintain it.
While the long-term trajectory of the AI trade, representing a massive economic shift, might be too significant to be fundamentally derailed by a single election, short-term volatility is highly probable. The sector has already experienced considerable ups and downs, currently reeling from concerns over frontier model profitability, capital expenditures, corporate cash reserves, debt levels among smaller cloud companies, and broader macroeconomic headwinds. The PHLX Semiconductor index (SOX) has dropped approximately 19% over the past month, and the Global X AI and Technology ETF (AIQ) is down about 10%.
Beyond Abbott's moratorium, other data center policies are at stake. James Talarico has proposed eliminating certain tax subsidies while enhancing standards for labor, environmental impact, and electrical grid usage, according to The Texas Tribune. However, this isn't a uniformly negative outlook for AI. Rob Rains of Washington Analysis suggested to CNBC that while significant Democratic victories at the state level could pressure the data center segment of the AI trade, they might paradoxically benefit AI companies at the federal level. He anticipates increased efforts to protect the industry and counteract Chinese competitors under a Democratic Congress or Senate.
Conversely, former President Donald Trump is viewed by some, like Paul Gallant of TD Cowen, as an ally to the AI trade. Gallant believes Trump would likely use his veto power to block any 'aggressive' AI model safety legislation that could materially harm technological investment. This dynamic could set up an interesting debate on whether Democrats pursue an AI safety law acceptable to Trump or prioritize messaging bills aimed at electoral success in 2028.
