US Midterms Shift Risk: Banks, Crypto May Suffer, Renewables Benefit

American voters have delivered a clear message to President Donald Trump, granting Democrats control of both houses of Congress. This shift, effective January, will empower the opposition to block legislative initiatives, complicate budget approvals, and launch investigations into the administration. For financial markets, this political realignment alters the risk landscape, potentially creating challenges for banks, oil and gas companies, and defense industries, while benefiting renewable energy sectors.

Significant uncertainty also looms over massive investments in artificial intelligence data centers. The Israeli stock market is experiencing this uncertainty, particularly in bank and insurance stocks, compounded by domestic political and budgetary instability. Dr. Bella Barda-Barak, a macro-economic and geopolitical commentator, described the situation as a "re-pricing of risks," calling it a "shock but not dramatic" given its predictability. She noted that while the results were worse for Republicans than polls indicated, the core issue is uncertainty regarding future legislative outcomes. She added that the global market's strong reaction reflects a range of unacknowledged risks, emphasizing that uncertainty is detrimental to financial, insurance, and credit markets.

Regarding the Israeli defense industry, which could be affected by changes in U.S. aid, Barda-Barak believes it will continue to thrive, with current agreements extending to 2028. However, Saar Vintroib, Deputy CEO of Pension and Provident Funds Investments at Altshuler Shaham, highlighted a geopolitical risk, suggesting that compromises President Trump might need to make could potentially come at Israel's expense. Experts like Vintroib and Gilad Keiser, Foreign Equities Manager at Migdal Insurance and Finance, see the impact on other Israeli sectors as primarily reflecting global trends rather than unique national consequences.

Keiser specifically identified the defense and renewable energy sectors as potentially most affected in Israel. While renewables might gain from a U.S. policy shift, defense industries could face hurdles with U.S. budget approvals. Vintroib stressed that the primary driver is American politics, with Israel being a secondary concern.

Amir Solomonovich, Foreign Investments Manager at Ayalon Insurance and Finance, explained that banks and cryptocurrency might be initially hit because Democrats favor increased regulation, contrasting with Trump's deregulatory approach that supported these sectors. He noted that the immediate market reaction should be viewed cautiously.

Regarding AI data centers, Keiser acknowledged uncertainty about the pace of construction in the U.S. due to potential electricity price concerns and state-level restrictions, though investments might shift to more welcoming locations. He also pointed out that recent stock declines in major AI companies suggest much of the impact is already priced in. Solomonovich, however, believes that despite potential regulatory slowdowns, the massive investment wave in AI and data centers, key drivers of the U.S. economy, will continue. Barda-Barak anticipates initial dips in data center-related stocks, followed by market correction, emphasizing that the Democratic focus is on the societal costs of AI, including environmental impacts like energy and water consumption.

Eli Yelovsky, Chief Investment Officer at Interactive Israel, identified renewable energy and healthcare as potential beneficiaries, while defense, oil and gas exploration, and AI infrastructure could be negatively impacted. He suggested that pressure to resolve the conflict with Iran could lower oil and gas prices, benefiting the economy through reduced transportation and production costs, thereby easing inflationary pressures.