By Michael Msika

(Bloomberg) -- Success in the midterm elections for the Republicans and the Texas gubernatorial contest would set up stocks for a further rally, according to Bank of America Corp. strategists.

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A strong showing on Nov. 3 for President Donald Trump's party and a re-election of Greg Abbott in Texas would be particularly positive for the artificial intelligence trade, wrote the team led by Michael Hartnett. The midterms are viewed as a major risk event for US stocks and volatility has historically risen in the months leading up to them.

"Should Trump hold Senate and Abbott hold Texas, expect stocks — especially AI — to rip into bubbly 2027," Hartnett said. However, should the Democrats take the Senate and unseat Abbott, stocks would face a "big slump" of over 10%, while the dollar and bond yields would also drop into year-end.

For the BofA strategists, the Texas race between Abbott and Democratic Party challenger Gina Hinojosa is a "referendum on affordability versus AI data centers," in a state that's already home to 335 centers, with proposals for another 247. They view the announcement of an effective temporary pause on data center expansion by business-friendly Abbott as reflecting of "electoral unease" over energy costs and risks to the grid.

Tech stocks have powered the S&P 500 index to fresh record highs this month as investors aggressively bought a dip in semiconductors and other AI-related stocks since late July, with second-quarter earnings exceeding already lofty expectations.

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Profit growth for the S&P 500 is tracking 32%, compared with the 23% projected before the start of the season, with 93% of technology stocks beating estimates, according to a Bloomberg Intelligence tracker.

Hartnett and his team see the "door wide open for bulls to rip risk higher," citing soaring earnings, a $10 trillion wealth surge in 2026 and over $1 trillion of AI capex expected in 2027. "Only constraints are bonds (yield surge), voters (socialist surge), plus fact that all positioned for upside," they said.

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