Market Story: First victims of the US midterm elections

A good compromise is when both parties are dissatisfied

Two days after the US midterm election, Americans are still not 100% sure who will take over Congress. Preliminary results indicate that in the case of the senate, the Democrats will maintain control. In the case of the House of Representatives, history repeats itself. In the past, when Congress was ruled by the party of the incumbent president, the opposition took power during the midterm elections. Everything indicates that it will also be like this this year and the Republicans will dominate the House of Representatives. This, may force politicians from both parties to reach many difficult compromises, which may adversely affect some companies and industries. One of them could be the semiconductor sector.

The semiconductor apple of discord

The Democratic Party, which currently has a majority in both houses of Congress, has passed the Chips and Science ACT bill, which aims to transfer nearly $ 52 billion to the US semiconductor market, which will be spent on research and reconstruction of the chip industry in the US. The bill was criticized by Republicans, who accused its authors of squandering public money in times of high inflation, overburdening the budget and insufficient safeguards against the influences of Chinese capital. Current data from polling stations indicate that the Republicans will take power in the House of Representatives, which may limit the funding for this sector. Two companies may suffer particularly from the implementation of this scenario, which was visible after the session on November 9, when the first election results started to appear. However, it is worth looking at this issue from a broader, fundamental perspective.

Advanced Micro Devices

AMD shares lost 6.16% at the end of November 9 session. From the fundamental perspective, the company has a well-diversified business, delivering products to both the CPU and GPU markets, with it being second only to Intel and Nvidia in both markets. AMD provides exposure to industries such as gaming, cryptocurrencies, metaverse, cloud computing, data center, and automation, where AMD-supplied systems are an indispensable, fundamental part of development process. The company also signed a long-term contracts with Microsoft and Sony related to the console market. Sales forecasts for this segment remain optimistic, both Microsoft and Sony expect higher sales of PlayStation 5 and Xbox. In addition, the acquisition of the American manufacturer from Silicon Valley, Xilinx, which developed the FPGA and so far has a half of the global market for devices made in this technology, may have a positive impact on margins. Thanks to this acquisition, AMD is counting on significant benefits related to the development of AI and edge computing.

Nvidia

Nvidia shares lost 5.66% in reaction to the first election results. The company is the main competitor of AMD, and despite the similarities  of their products, the technology of Nvidia graphics chips seems to be slightly better in terms of quality (at the expense of a higher price). The company operates mainly in the gaming and database sector, which, according to most analysts, will expand dynamically in the coming years. In addition, profits may be increased by the Omniverse virtual simulation segment, the 'digital twin' technology and the growing popularity of cloud gaming. The semiconductor market has recently faced the specter of stagnation in China, after the US imposed sanctions on this country. Nevertheless, Nvidia has confirmed that the US government will allow it to continue developing its H100 artificial intelligence chip in the second biggest economy in the world.

What's next?

Before the elections, market consensus assumed that the Republicans would take over the House of Representatives. However the negative reaction of investors to the first election results, which came in line with expectations, gives much food for thought. The increasingly likely victory of the Republican Party in the race for the House poses a major risk factor for the semiconductor sector. Nevertheless this technology has significant long-term potential that seems to outweigh the short-term political factors, which may change depending on the economic situation and the current balance of power, also globally, especially since the situation of Taiwan, which is one of the main semiconductor production hubs, seems to be more and more uncertain.