Midterm elections in the United States are emerging as a major hidden risk for a US stock market currently riding high on the AI boom.

Over the past few weeks, polling and prediction market results have tilted heavily toward the Democratic Party, which is now increasingly favored to win control of at least one chamber of Congress.

In response, Wall Street strategists argue that if this scenario materializes, stocks that have benefited from the AI frenzy—many of which carry lofty valuations and offer very little margin for error—could come under pressure, as a Democrat-led Congress may launch investigations, hold hearings, or even introduce stricter regulatory rules.

Brian Mulberry, Chief Market Strategist at Zacks Investment Management, said that if Democrats perform strongly in the November elections, hearings on AI safety issues will "not only increase in number but also become far more combative." Mulberry believes that as headlines from Washington fuel trader concerns about congressional action, the AI trade will be thrown into turbulence.

It is understood that senior Democrats have been preparing to investigate companies tied to the Trump administration and his family. Additionally, a group of Democratic senators reportedly urged Trump on Wednesday to reach an agreement with China to mutually slow or pause AI research and development.

Tobin Marcus of Wolfe Research wrote in a note to clients last week that the recent surge in concerns about the potential risks of AI systems has made safety issues "a more realistic topic for Congress in 2027." The policy-focused strategist expects Democrats to establish a "select committee on AI," summon industry executives for questioning, and possibly even issue subpoenas.

Market observers have long flagged this risk. Last month, Michael Hartnett of Bank of America warned that a Democratic sweep of both the House and Senate—plus a win in Texas—could trigger a 10% drop in US stocks, citing potential policy shocks to AI-related sectors. Strategists led by Jenny Yang and Alex Altmann at Barclays said AI infrastructure and data center construction could face stricter scrutiny, a risk the market has "partially overlooked."

As the likelihood of congressional investigations rises, strategists led by Sarah Bianchi at Evercore ISI wrote in a Tuesday report that "the broadest market risk comes from investigations and hearings on industry-related issues, especially in the large-cap tech/AI space." These strategists are particularly focused on whether investigations will uncover new information about runaway AI agents or internal communications acknowledging AI safety hazards.

However, AI is just one item on the long list of investigations Wall Street expects. Evercore ISI believes the number of follow-up investigations could be so large that investors will struggle to keep up with all of them. The firm also expects Congress to launch investigations into industries tied to voter concerns about the cost of living, including energy, healthcare, food, and agriculture. Strategists had previously warned that companies in which the US government holds equity stakes—such as Intel (INTC.US)—could also face risks.

Of course, even if Democrats win both chambers, Trump can still exercise veto power, making it nearly impossible for relevant legislation to pass without his support. Trump has now become a supporter of the AI industry and has repeatedly rejected calls to impose restrictions on data center construction or slow the development of advanced models.

So far, investors have largely shrugged off concerns stemming from various regulatory calls. After a period of turbulence, the Philadelphia Semiconductor Index has risen 5.1% so far this week, and the tech-heavy Nasdaq 100 hit its first record high since June on Tuesday.

But the market is far from being out of the woods. Beyond holding hearings, committees can also propose legislation. If a so-called "blue wave" materializes in November—as prediction markets suggest—US stocks could take a hit as investors begin pricing in greater policy risks after the 2028 election, particularly those related to higher corporate taxes and AI regulation.

Scott Chronert, Head of US Equity Strategy at Citi, wrote in a note to clients this week that if Democrats sweep both chambers of Congress, key committees will fall into Democratic hands. "We view this as a modest negative for AI-related trades and sectors that have previously benefited from regulatory easing. Over the next two years, a batch of market-unfriendly bills will be sent to Trump's desk awaiting veto; if that happens, a backlog of policy proposals will build up and then advance rapidly after 2028."