U.S. equity markets initially surged following a “Blue Tidal Wave” of U.S. midterm election results, but the rally lasted just one day as weakness in the Technology sector sparked a broad sizable decline on day 2 following the results. Democrats outperformed even the high-end of positive expectations, recapturing control (with strong majorities) of both chambers of Congress (the House of Representatives and the Senate) and also seizing governor seats in multiple states. The results ensure that as of January 2027, U.S. governing structure (between the executive and legislative branches) will be divided between the two political parties. Split control will define the final two years of the Trump Administration, following Republican control of the House, Senate, and presidency in 2025 and 2026. Although election odds from polling surveys and prediction markets clearly favored Democrats (allowing financial markets to prepare for a split government result), election outcomes contain high uncertainty. Ultimately, the margin of victory was resounding, and more than many investors expected.
The initial positive market reaction (equities higher, interest rates and oil prices lower), in our view, was partially a clearing event with the election concluded after equity index gains had largely stalled since mid-year and both interest rates and oil prices had surged higher. As well, markets contemplated the benefits of split government, which often prevents Congress from passing major legislation (reducing uncertainty). In addition, large Democrat majorities could change the trajectory of President Trump’s second term, perhaps convincing him to soften positions on tariffs and trade policy. But optimism faded on Thursday, 11/5/26, as investors assessed potential roadblocks to artificial intelligence (AI) data center and infrastructure projects. Multiple new state governors campaigned on limiting data center expansion, and dozens of municipalities voted to restrict data center projects in Tuesday’s elections. For now, we view data center resistance as more of a “build it the right way” (avoiding hardship on the local community) rather than a “not build it at all” issue, but the pushback raises questions about the pace of non-residential fixed investment (a Commerce Department category that measures business investment including data centers) commitments, which has been a meaningful contributor to U.S. economic growth in 2026. A slowdown in AI-related spending would also create headwinds for overall corporate earnings growth as the Technology sector has been the largest contributor to S&P 500 earnings growth in recent periods.
We believe that demand for AI compute remains on a strong growth path and leading companies have communicated plans to increase capital spending in 2027 and beyond. While the pace of investment could change if financial conditions tighten (limiting access to capital) or the economy slows, the political resistance in 2026 threatens to slow the supply of compute capacity but is not a demand issue. Strong demand is a core component of a healthy product or service and, ultimately, we expect companies to find ways to meet that demand. But data center opposition should be taken seriously and could remain a headwind for the industry well into 2027. The midterm election results suggest that roadblocks and regulation will be considered as voters have voiced a populist concern. Perhaps providing some downside market support as sentiment deteriorates is a combination of positive economic and earnings fundamentals that have exceeded expectations. In addition, we expect that many states and communities will pursue AI data centers and infrastructure projects that deliver high-paying jobs, tax revenues, and community investment. In addition, the U.S. must maintain its global leadership in AI capability and support, and restricting innovation becomes a national security issue.
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Market Indices: The information on indices is presented for illustrative purposes only and is not intended to imply the potential performance of any fund or investment. Indices provide a general source of information on how various market segments and types of investments have performed in the past. Index performance assumes the reinvestment of all distributions, but does not assume any transaction costs, taxes, management fees, or other expenses. You may not invest directly in an index. Past performance is not an indicator of future results. The S&P 500 Index is a market cap weighted index that is designed to measure the US large-cap equity performance. The index is composed of the 500 leading publicly traded US companies based on size, liquidity, industry, and profitability criteria. The Dow Jones Industrial Average is a price weighted index that tracks 30 large, publicly owned companies trading on the New York Stock Exchange (NYSE) and the NASDAQ. The Russell 2000® Index is a market cap weighted index that measures the performance of the 2,000 smallest companies in the Russell 3000® Index. The Russell 1000 Growth index includes the Russell 1000 companies that exhibit relatively higher price-to-book ratios, and higher expected earnings and sales growth. The Russell 1000 Value index includes the Russell 1000 companies that exhibit relatively lower price-to-book ratios and lower than average expected earnings and sales growth. The S&P 500 Equal Weight Index is the equal-weight version of the S&P 500, which is weighted by market capitalization. In the Equal Weight version, each company is assigned an equal weight, about 0.2%, and is rebalanced quarterly. As of 11/5/26 the market capitalization weights of the S&P 500 index were as follows: Information Technology (35.5%), Financials (12.8%), Health Care (10.6%), Consumer Discretionary (9.5%), Communications Services (8.8%), Industrials (8.1%), Consumer Staples (5.2%), Energy (3.5%), Utilities (2.1%), Real Estate (1.9%), Materials (1.8%).