The artificial intelligence (AI) trade, which has powered much of Wall Street's bull-market rally, has been under pressure for quite some time now. Concerns about generating adequate returns compared with the massive investments being made in it, rising rate worries and the evil impact of rogue AI agents on cybersecurity have kept AI investing in a tough spot over the past month.

Now, the space is likely to face another challenge following the Democrats' strong performance in the 2026 midterm elections. With concerns mounting over data center construction, energy consumption and regulatory hurdles, investors may want to consider diversifying into other sectors.

Shares of Elon Musk's SpaceX and Tesla fell with the results showing Democrats’ easy victory on Wednesday, amid losses for Republican candidates backed by Musk. AI-linked stocks also came under pressure as Democrats, viewed as the proponents of data center moratoriums, made significant gains in key data center states, per CNBC.

The Texas governor's race emerged as a particular concern for technology investors. Democrat Gina Hinojosa has been outspoken in her support for a moratorium on AI data centers. According to Wells Fargo, Texas accounts for 27% of planned U.S. data center capacity, as mentioned in the same CNBC article.

CoreWeave, which uses borrowed money to build data centers, fell 4.2% in premarket trading on Wednesday, while Nebius Group declined 1.5% and Oracle lost 2.4%.

AI Infrastructure Faces Growing Political and Regulatory Risks

The election outcome adds to existing concerns about the sustainability of massive AI infrastructure spending. The Nasdaq-100 already entered correction territory toward the end of October as investors questioned the pace of data center investments by major hyperscalers and private AI companies.

A stronger Democratic presence in key data center states could increase the risk of construction delays, moratoriums and higher compliance costs. This could weigh on companies involved in data center development, cloud computing and AI infrastructure.

Iran Could Become a Wild Card for Markets

More importantly, a renewed conflict with Iran could derail the anticipated post-midterm market rally. Evercore ISI had already warned that the S&P 500 could fall by double digits and end the year at 6,800 if the administration escalates military action against Iran before the new Congress takes office in January, particularly if Democrats win control of Congress, per CNBC.

Is It Time to Consider Consumer ETFs?

With the AI trade facing political and valuation-related uncertainties, investors may consider diversifying toward consumer-focused ETFs.

Democrats will likely push for restoring expired Affordable Care Act enhanced premium subsidies. Hospital-related stocks such as HCA Healthcare and Tenet Healthcare, as well as health insurers like UnitedHealth and Centene, may gain now.

We may see a solution to the Iran war, which may drag down energy prices to some extent and provide relief to U.S. inflation. A falling inflation environment could help U.S. consumers.

Inside Strong Consumer Spending

Investors should note that consumer spending grew 3.8%, in line with the rate in Q2 and the strongest since the end of 2024, as quoted on Yahoo Finance. The Conference Board reported that consumer confidence is improving, despite sticky inflation and higher gas prices.

Overall, the U.S. Consumer Confidence Index rose to 91.7 in October 2026 from an upwardly revised 84.2 in September. The Expectations Index rose by 6.9 points to 72.6, reflecting a short-term improvement in outlook for income and business.

Holiday Spending Set for Strong Growth?

U.S. holiday retail sales are expected to hit a record $1 trillion-plus during the November-December shopping season, according to Bain & Company. Sales are projected to rise 4.5% year over year, faster than the 3.5% growth seen in 2025. The National Retail Federation predicts retail sales in November and December will rise 4.2% over 2025.

Meanwhile, Mastercard Economics Institute expects U.S. retail sales, excluding autos and gas, to rise 5.5% year over year from Nov. 1 to Dec. 24, marking the strongest holiday growth since 2022.

ETFs in Focus  

The above-mentioned scenario puts ETFs like State Street Consumer Staples Sel Sect SPDR ETF (XLP Quick QuoteXLP - Free Report) and VanEck Retail ETF (RTH Quick QuoteRTH - Free Report) in favorable spots. iShares US Healthcare ETF (IYH Quick QuoteIYH - Free Report) and iShares U.S. Healthcare Providers ETF (IHF Quick QuoteIHF - Free Report) may be up for gains in the coming days.