The midterm election outcome and the market selloff that followed have exposed the stock market's vulnerability to stretched bets on artificial intelligence. Expectations of returns may now need a reset. Friday's rebound did not come close to erasing the biggest technology stock wipeout since the Covid pandemic. Investors have stopped selling indiscriminately, but re-risking now is for the brave, given political and broader uncertainties and their potential impact on economic growth and earnings.
Wolf von Rotberg, equity strategist at Bank J Safra Sarasin, said the underlying macro picture has started to shift, dragging equities lower. "A large and quick rebound is unlikely," he said. Liquidity strain means financial conditions look as tight as they did in the early days of the Iran war in March. The spike in volatility futures suggests short-term risks are the main concern.
The US inflation print on Tuesday is the key macro release of the week, following stronger-than-expected core inflation readings for August and September. It will test whether underlying price pressures remain elevated and help reassess the path for interest rates. Traders have reduced bets on a December Federal Reserve hike. Lower yields and a less hawkish Fed could ease pressure on equity valuations.
The AI trade now faces enormous capital spending, crowded positioning and hard questions about future returns. Barclays Plc estimates that about 80% of the high-probability data-center pipeline reported by utilities will be in states with Democratic governors in 2027, up from less than 30% this year. Joachim Klement of Panmure Liberum warned that if hyperscalers slow capex growth, earnings downgrades would follow across the data-center supply chain. Analysts have pegged earnings growth at 29% this year, with further gains of 19% and 16% in 2027 and 2028, so those expectations may need an overhaul.
Source: Bloomberg Markets · Summarized by HeadlinesBriefing