Market Perspectives: Making sense of the midterms

The Democratic takeover of both chambers should produce legislative gridlock, while AI investment and a resilient US economy continue to support markets despite near-term volatility.

• Democrats will control the House and Senate from January 2027, but President Trump can veto legislation, limiting the practical reach of AI regulation and other initiatives.
• US petrol prices are up 40% this year, and the fall in oil prices suggests markets expect the Iran conflict to move toward stalemate rather than escalation.
• Markets rallied after the election, consistent with the historical strength of divided government and the third year of a presidential term, before technology stocks led a later sell-off.
• Hedge-fund deleveraging through October and November, together with systematic strategies, probably amplified the market move as investors reassessed regulatory risks and data-centre expansion.
• The AI build-out exceeds earlier investment cycles such as electrification, railroads, telecoms and fibre networks, while rapid construction, scarce resources and higher raw-material costs raise capital-allocation risks.
• Strong nonfarm payrolls data and reduced expectations for Federal Reserve rate hikes after the oil-price decline leave the US economy in supportive condition.

Takeaway: The pullback appears to reflect regulatory and positioning concerns rather than weaker fundamentals, so the multi-year AI investment theme still has room to run, although capital discipline and data-centre constraints require monitoring.