Weekly Investment Update (11/06/2026)

Volatility intensified this week, as Thursday’s selloff saw the S&P 500 decline 4.4% and the Nasdaq fall 5.5%. What began as a reassessment of companies benefiting from the massive investment in AI infrastructure quickly spread across the broader equity market. Friday saw a moderate rebound, up 1.1% as of this writing. Today’s October jobs report was also strong, with payrolls rising 165,000, more than double what economists expected, and hiring broadening across industries, suggesting the underlying strength in the economy remains intact.

The market is increasingly questioning the pace and financing of AI investment, with the election results introducing an additional layer of uncertainty around data center development. The potential for more restrictive policies, particularly in states critical to future capacity growth, has caused investors to reassess the outlook for semiconductors, power generation, and other beneficiaries of AI spending. Crowded positioning, momentum reversals, and potentially forced selling likely amplified the market's reaction. 

We should neither dismiss today's risks nor extrapolate recent market behavior indefinitely. On balance, we see several reasons to remain constructive. 

First, the long-term economic potential of AI remains considerable, supported by improving technology and accelerating adoption. Political opposition to data center construction is a legitimate risk, but the economic benefits of investment, employment, and local tax revenues may ultimately encourage more pragmatic policy outcomes. Near-term activity remains robust, but the market is now pricing in a substantially more cautious outlook —a disconnect worth watching. 

Second, valuations have moderated meaningfully. Today, the S&P 500 trades at a ~18x forward earnings multiple vs. ~22x earlier this year; this is a significant adjustment, particularly without a comparable deterioration in corporate earnings expectations. History offers several examples of substantial valuation corrections that did not ultimately lead to recessions, including 2018 and 2022.

Third, tighter financial conditions could reduce the need for additional monetary tightening, and a moderation in AI-related capital spending could eventually relieve some inflationary pressures. 

Periods like this reinforce why we build diversified portfolios that balance opportunities for long-term growth with risk management, with an emphasis on resilience as market leadership shifts or volatility rises.

Midterm Implications: Limited Federal Policy Change, Greater State-Level Impact

What is happening: Tuesday’s midterm elections saw Democratics win control of both chambers of Congress by a wider margin than polls and markets anticipated, with Democratic  candidates outperforming across the map and in states few forecasters had in play. The scale of the result reflects voter frustration with energy prices and general affordability, a theme that has dominated the political narrative since the start of the Iran war. Democrats have flipped seven Republican-held Senate seats so far, including battlegrounds like Maine, North Carolina, and Ohio, as well as historically deep-red states such as Iowa, Texas, Kansas, and South Carolina. Alaska and Mississippi are still being counted, and wins in both would lift the Democratic majority to 56 seats from the current 54, including independents who caucus with the Democrats. In the House, Democrats so far have gained 41 seats for a total of 241 among the results that have been called.

In the gubernatorial contests, Democrats won back control in Texas, Ohio, Georgia, New Mexico, and Nevada, five states with significant planned data center capacity, on platforms ranging from an immediate moratorium on new projects in Texas to conditional moratoriums requiring data centers to cover their full utility costs in Ohio.

The lame-duck period is the stretch between Election Day and the new Congress being sworn in on January 3. Before the December 11 deadline, the Republican-controlled Congress faces decisions on fiscal 2027 government funding and expiring surface-transportation authorizations, which could be addressed through new legislation or temporary extensions. A short-term extension into 2027 appears most likely. The federal debt ceiling is also expected to become binding in the first quarter of 2027. The calendar also includes the Asia-Pacific Economic Cooperation summit on November 18-19, the Group of 20 summit on December 14-15, higher U.S. tariffs on Canadian steel and autos on January 1 (likely to be averted) and the deadline for the U.S.-China trade truce on January 10 (likely to be extended).

Why it matters: Despite the size of the Democratic win, we expect only a modest shift in policy at the federal level, where the president’s veto and limited willingness to reduce the deficit on either side limit what can change. While policy uncertainty remains a risk, the more notable shift is happening in the states, where newly elected governors are likely to reshape the rulebook for data center development.

Newly elected Democratic governors in Texas, Ohio, Georgia, New Mexico, and Nevada have proposed measures that could slow data center development, including tighter approvals, changes to tax incentives, and requirements that developers bear additional utility costs. The timing and scope of any changes will depend on the measures adopted after they take office and the applicable legal and regulatory processes. With roughly seven in 10 Americans opposed to a new data center in their own community, we expect more state and local restrictions to follow. The more likely outcome is delays and higher costs for new projects rather than outright bans, with developers retaining the option to redirect some capital to more receptive states although relocation could entail additional costs and delays . If anything, data center regulation favors owners of existing, fully permitted capacity over developers of new projects, but the broader investment cycle looks resilient. To read more about our thoughts on the election implications for data center development, please see our recent note, “Midterm Elections: Our Economic Outlook Remains Intact.”

At the federal level, the president has more room to work with a Democratic Senate than the headlines indicate, particularly on affordability, where the two sides overlap on credit card competition, higher deposit insurance limits, tax breaks for first-time homebuyers, and faster energy permitting. His veto makes broad tax increases unlikely, and the administration retains substantial authority over trade and deregulation through executive action.

Fiscal policy is already on track to turn more neutral for economic growth next year, and the new Congress is unlikely to meaningfully alter that. The probable endgame pairs higher defense spending with higher nondefense spending with reductions to previously enacted Medicaid spending cuts, with Democrats potentially using the debt ceiling as leverage. Because those talks will likely run into the second half of 2027, more substantial policy changes are more of a 2028 story. Deficits should stay wide at roughly 6% of GDP, with policy changes in the year ahead amounting to a modest boost of 0.2-0.3% of GDP.

For markets, the S&P 500 recorded positive price returns over the 12 months following each midterm election from 1950 through 2022, averaging approximately 15% when measured from Election Day. But specific to this cycle, election-related uncertainty over data center development is likely to persist until there is more clarity on the trajectory of state and local restrictions. Looming Fed rate hikes and regulatory uncertainty around data centers may argue for more defensive positioning. However, we see a growing possibility that, if the Fed raises rates in December, it could be the final hike of this tightening cycle, while state and local regulation is likely to be incremental and not enough to meaningfully slow data center development. As a result, we believe the investment cycle remains intact, with Fed policy and data center regulation likely to be key influences on the AI capex cycle and broader equity market going forward. For fixed income, elevated fiscal deficits and capex-led growth should keep upward pressure on longer-term Treasury yields. The Iran war remains another important near-term swing factor, and we believe electoral pressure may create additional incentives for diplomacy, though the timing and outcome remain uncertain Given the administration’s acknowledgement that the war was a key factor in the midterm results, odds of further de-escalation are rising.