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Following the US midterm elections, markets are reassessing the pace of AI-related growth, but the long-term investment case for AI remains intact
We view the recent weakness in AI-related stocks as an unwinding of crowded positioning, rather than a sign of slowing demand, earnings or capex growth
Contained moves in bond markets remain reassuring; falling yields suggest easing financial conditions and still-positive economic growth
We see the correction as a buying opportunity and rebalance portfolios. We expect stock market leadership to continue broadening, creating opportunities across sectors and regions while leaving our constructive outlook for equities intact.
Equity markets are reassessing the pace of future growth in AI following Democrats’ sweep of the US midterm elections. Investors are questioning whether the AI investment cycle is nearing a peak and what that could mean for future spending. Yet we believe that the long-term case for AI remains intact.
On 5 November, the S&P 500 closed 4.36% lower, its largest fall since April 2025’s ‘Liberation Day’ tariff announcements. The tech-heavy NASDAQ index dropped 5.52%. Volatility continued on 6 November in Japanese and South Korean markets.
This is not the first time in recent weeks that the rally in AI-related stocks has come under scrutiny. This time the US midterm elections provided a catalyst. Investors are worrying that any new Democrat-led legislation at the federal or state level would force tech firms to slow infrastructure spending and limit data-centre construction. This has led stock markets to question the sustainability of the broader rally.
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However, we see the selloff as reflecting an unwinding of crowded AI-investment positioning rather than a fundamental shift in the technology’s long-term outlook. Demand for AI remains robust, as evidenced by accelerating compute prices and strong, supply-constrained cloud revenue growth.
We see the selloff as reflecting an unwinding of crowded AI-investment positioning rather than a fundamental shift in the technology’s long-term outlook
Market moves also ignore the fact that many US data centre projects are already in the pipeline, and even the most bearish outlook does not question the level of capital expenditure still programmed to roll out in 2027. At the legislative level, we also see US-wide restrictions on AI data centres as unlikely, because the president retains veto powers that Congress cannot override, as the Democrat majority falls short of a two-thirds ‘super majority.’
Crucially, we do not believe that AI demand has evaporated. Enterprise adoption continues to accelerate, cloud providers remain committed to long-term AI investment, and earnings are still robust.
Crucially, we do not believe that AI demand has evaporated
Technically overdone
The market moves therefore look technically overdone. While there may be some pressure to regulate AI, we see this as a sector rotation and earnings calibration story. Investors appear to be unwinding technically crowded positions after an extended period of exceptional performance. Mid-cycle corrections, such as we saw with the announcement of US tariffs in April 2025 or the start of the Iran conflict in February, are part of any extended bull market.
Market moves in other asset classes also support our reading. Bond yields have continued to fall during the equity selloff. That indicates that inflation fears remain contained. Importantly, the bond market is not signalling recession; rather, it is pointing to slower but sustainable economic growth.
Importantly, the bond market is not signalling recession; rather, it is pointing to slower but sustainable economic growth
The sharp AI-driven correction has unsettled market sentiment but does not alter our investment outlook. The bond market is signalling easing financial conditions.
Overall, equity market moves look more like a reset in expectations. We expect the narrow AI-led rally to extend beyond a handful of mega-cap stocks to other sectors and regions. This should leave the long-term case for US equities intact. We see corrections of this magnitude as opportunities to add exposure and have rebalanced our portfolios accordingly.
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