On My Mind: Out of the Blue

The Democratic takeover of Congress should produce looser fiscal policy, slower and costlier AI infrastructure investment, and sustained upward pressure on rates rather than economic stagnation.

• Texas, Ohio and other states are likely to impose tougher conditions on new data centers, including reduced tax incentives, contributions to power generation, subsidies for higher electricity costs and local employment commitments.
• AI-related capital expenditure contributed 1.4 percentage points to the 2.1% annualized US growth rate in the third quarter of 2026, while the comparable measure averaged 0.5 percentage points from 2015 to 2022.
• After allowing for imported hardware, Franklin Templeton estimates AI capex contributed about 0.4% to 0.5% of growth, and halving that spending would reduce GDP growth by less than 0.25 percentage points.
• Proposed Democratic measures, including reversing Medicaid cuts and extending Affordable Care Act tax credits, could cost US$250 billion to US$330 billion annually over 10 years; reversing tariffs could add US$140 billion, producing a combined US$390 billion to US$470 billion.
• The author expects two to three Federal Reserve rate hikes beginning most likely in December, with fair value for 10-year Treasuries at 5% to 5.50%; quality-adjusted high-yield spreads are near the 29th percentile of their 30-year range, while CCC spreads are near the 99th percentile of their five-year range.

Takeaway: Investors should expect resilient growth, persistent inflation pressure and higher bond yields, while credit selection should favor durable cash flows and borrowers with manageable refinancing needs.