U.S. midterms: Citi breaks down implications for economy and markets

Democratic gains shifted control of Congress, putting U.S. economic policy, AI investment and markets under scrutiny, Citi said.

Democrats gained 41 House and eight Senate seats, securing both chambers when the 120th Congress begins on January 3, 2027; several races remained uncalled. Citi cited living-cost frustration and concerns about AI infrastructure.

U.S. consumer prices have risen 30% since the pandemic, or about 4% annually. Pandemic-era inflation drove much of the increase, while tariffs and the Iran conflict added pressure on purchasing power.

Longer-term inflation expectations rose across political groups, although Republican expectations remain below levels when Donald Trump took office.

AI backlash raises prospect of state-level regulation

Fewer than 30% of Americans support AI deployment at its current pace, according to a Wall Street Journal survey cited by Citi.

Concerns include data centre construction, grid strain, electricity bills and job losses. Since ChatGPT launched in late 2022, residential electricity prices in the five states with most data centres have risen nearly 20%, against a 12% national median. Democrats won gubernatorial races in three - Texas, Ohio and Georgia.

Markets have reassessed whether opposition could prompt tighter regulation and slower AI spending, adding to volatility in U.S. equities, particularly AI-linked shares.

Citi sees limited scope for federal reversal: Democrats lack veto-proof majorities or the 60 Senate votes needed to overcome a filibuster; the president retains broad foreign-policy discretion.

Citi sees greater scope for state and local restrictions: removing data centre tax incentives, shifting electricity costs to operators through rate-payer protections, and siting rules steering facilities towards brownfield industrial sites, away from greenfields and residential areas.

AI spending remains a key market focus

Citi said the AI boom's sustainability is crucial. Businesses are investing to improve productivity and profitability, making AI important to competitiveness; the spending surge is a U.S. growth driver.

Public opposition and regulation could delay data centre projects and slow investment.

However, electricity supply, grid capacity, labour and other inputs already constrain construction. Slower development could give these bottlenecks time to ease. Citi expects regulation to change infrastructure's location, cost and pace rather than halt the AI investment trend.

Investors will watch AI capital expenditure and state rules that could raise costs or delay projects. Citi said the election shifts the political environment, but not necessarily the U.S. economic policy trajectory.