Atlantic Crosswinds: Europe After the US Midterms

US midterm gridlock may support equities in the short term, while persistent inflation, high real rates, fiscal constraints and political uncertainty remain the main risks for European markets.

• Franklin Templeton Institute’s review of nine US midterm elections from 1990 to 2022 found an average S&P 500 gain of 14.5% in the following 12 months, with positive returns after every election.
• Inflation remains a central political issue, with UK domestic energy bills expected to rise by at least 20% in January and European central banks prepared to keep tightening into next summer.
• AI infrastructure will continue to attract structural demand, although US and European authorities may impose tighter rules on data-centre locations, electricity use, water consumption and supporting infrastructure costs.
• Power generation, transmission and electrical equipment could benefit from the AI investment cycle, while regulatory costs and permitting delays may slow project development.
• European sector dispersion could widen as health care faces drug-price and reimbursement scrutiny, financial institutions face stronger congressional oversight, and defence and energy companies remain exposed to spending and permitting decisions.

Takeaway: Investors should focus on earnings growth, real interest rates and the durability of AI investment, while recognising that large fiscal deficits, heavy Treasury issuance and limited European budget flexibility may constrain the policy response to future shocks.