The 2026 midterm elections will significantly change the country’s regulatory environment, most notably with Democrats securing control of both chambers of the U.S. Congress and winning big in traditionally business-friendly states such as Texas and South Carolina.
Over the past two decades, Southern states such as Florida and Texas have attracted large-scale corporate migration from blue states. Less regulation and lower taxes. These same benefits also attracted many people seeking tax relief, lower housing costs, and better economic opportunities. As a result of this political shift, relocated companies may now face an increased emphasis on energy and building constraints and increased legal oversight.
Information technology, semiconductors and traditional energy sectors faced immediate headwinds after the election. Companies at the forefront of the AI boom, including CoreWeave, Tesla and SpaceX, saw their stock prices fall as markets priced in increased regulatory oversight from Democrats and potential restrictions on AI adoption. For example, Sen. Bernie Sanders reposted his efforts to promote a data center moratorium proposal he co-authored with New York state Rep. and socialist Alexandria Ocasio-Cortez.
Markets are suddenly realizing that the fastest-growing parts of the U.S. economy could come to a screeching halt during the transition of states like Washington and Texas. More than half of the U.S. hyperscale data center pipeline could face increased regulatory friction. When building new facilities, even assuming permits are granted, developers could face increased taxes, strict “bring-your-own-power” requirements, or delays in obtaining new air permits for on-site gas plants. As the cost of all-in construction increases and schedules are extended, the immediate demand for advanced chips will snowball in the hardware supply chain.
While traditional oil and gas majors fell, solar and green energy stocks rose on expectations that a Democratic Congress would resume pushing for subsidies. Additionally, due to the ongoing war between the United States and Israel and Iran, oil prices rose sharply throughout the year. With Democrats in control of Congress, President Trump faces a legislative branch that could significantly limit military options and push back on defense spending. The Iranian government almost certainly recognizes that the politically weakened Trump administration has greater incentive to seek a negotiated agreement, and Secretary of State Marco Rubio has now indicated that it is preferable to the escalating option of any movement. As a result, oil prices plummeted, with Brent crude below $95 per barrel.
For similar reasons, expected congressional resistance to the $1.5 trillion Pentagon budget also hurt the market for defense contractors. Health care stocks, as measured by XLV, at least rose today, but are still above pre-election levels, as are grocery stocks like Walmart, Costco, Kroger and Dollar General on hopes that a Democratic Congress could increase federal spending in these areas.
This may help explain why costco was one of the relatively few stocks to close higher on Thursday, and it also explains why it ranks as the 15th most active single stock option (in nominal terms), ahead of stocks like JPMorgan, Marvell, Oracle, Eli Lilly and Dell.
With a forward earnings ratio of about 46x, Costco (a regular on the Holly index (MELLOY, can you link to this)) isn’t cheap, but it’s far from cheap. The average forward multiple is actually several turns higher, at over 49x. So what were people trading? Mostly short-term call options. One possible reason? Costco doesn’t just trade at a relatively high multiple. As always, it’s also simply a more expensive product. So, with the stock price in dollar terms at over $1,065 as of Thursday’s close, it would cost more than $100,000 to start a “round lot” (of 100 shares), which, like many items packaged at Costco, may be a little more than some buyers need (or want).
Costco since the beginning of the year
Alternatively, a call option allows an investor to gain exposure to 100 shares at a much lower cost than buying the stock. For example, buying a January 1060 call would cost about $53.45, and participating in the price of 100 shares with a strike price of $1060 would cost $5345. While that may seem preferable, astute observers may note that past highs sometimes have technical resistance, with Costco peaking at around $1,090 in mid-May. Selling a call at or near that level, such as January’s 1090 yen level 39.65, can further reduce trading costs in hopes of a pause before a new high. This reduces transaction costs to $13.80, or just under 1.3% of the current stock price.
I’m not saying $1,380 is a small expense for a 1-lot call spread on a popular stock trading at 46x forward earnings. Eight 6-ounce A5 Wagyu filet mignons cost less than $520 (Costco’s online-only sale is available now). But relatively speaking, Costco steaks and Costco options are both very affordable. However, during the strike you will be offered participation in 100 shares of Costco at only 30% more than the price of one underlying share.
Disclosure: Tidal owns/holds all securities mentioned in the article.
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