Week in Review
Recent market volatility has understandably raised concerns among investors, particularly following the midterm elections and renewed scrutiny of the significant capital investment supporting AI. While markets are adjusting to a changing political landscape and questions surrounding AI infrastructure spending, we believe it is important to distinguish near-term uncertainty from the underlying economic fundamentals.
As discussed in our quarterly outlook, equity markets have historically delivered positive returns following midterm elections. This pattern is less about which political party wins and more about the reduction in uncertainty once election outcomes become clear. Investors can shift their attention away from political speculation and back toward corporate earnings, economic growth, and monetary policy. The prospect of divided government may also constrain sweeping federal policy changes, although uncertainty surrounding specific policies will likely persist.
One area attracting particular attention is the AI infrastructure buildout. Following the election, proposals for restrictions or temporary moratoriums on new data center development in certain states have raised concerns about the sustainability of AI-related capital expenditures. While these developments introduce potential challenges, we believe underlying demand for computing infrastructure remains strong, supported by continued AI adoption and growing computational requirements across industries. The pace of investment may fluctuate, but the longer-term drivers of demand remain intact.
Importantly, data center development involves years of planning, permitting, grid interconnection, equipment procurement, and financing. Significant investment commitments are already in place, with substantial capacity under construction and additional projects supported by existing agreements. While regulatory changes could delay development, particularly for projects in earlier stages, existing commitments make an immediate reversal of the broader investment cycle less likely. Restrictions in certain regions could also encourage companies to redirect future investment toward markets with more favorable regulatory environments and greater access to power. Such adjustments may affect the timing and location of development without necessarily undermining the long-term demand for AI infrastructure.
Nevertheless, meaningful risks remain. Higher financing costs, regulatory uncertainty, power availability, and questions surrounding returns on AI investment warrant continued monitoring. Strong demand for computing capacity does not guarantee that every project will generate attractive returns, particularly given the substantial capital required. As expectations for AI-related growth remain elevated, markets may be especially sensitive to developments that challenge the anticipated pace of investment or profitability.
Looking ahead, we remain constructive on the long-term demand for AI and the infrastructure required to support its growth. At the same time, we expect market volatility to persist as investors navigate policy uncertainty and reassess expectations for AI-related investment returns. Against this backdrop, we believe maintaining a diversified portfolio and a disciplined, long-term investment approach remain essential to navigating near-term uncertainty while participating in future growth opportunities.
Week Ahead
The coming week will provide updates on inflation at both the consumer and producer levels. Markets will focus on whether recent price pressures are showing signs of cooling, and how the data will affect the Federal Reserve’s policy decisions.
Inflation: Consumer and Producer Prices
The October Consumer Price Index (CPI) is scheduled for release next Tuesday. Investors will be looking for signs of cooling, as the Fed is prioritizing bringing inflation back down to its 2% target. September’s 3.7% CPI reading largely reflected a rise in energy prices, and investors will be looking to see how energy and other pricing pressures impact October’s reading. The Fed raised interest rates by 25 basis points in September to 3.75% to 4.00% and held rates steady in October, with markets predicting, as of November 6, a 77% chance that the Fed raises interest rates in December by another 25 basis points.
Along with CPI data, the Producer Price Index (PPI) is scheduled for release next Friday. The data will show how price pressures have been impacting producers, and ultimately how producer prices are impacting retail pricing.
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