by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment opens with our assessment of the midterm election results and their potential implications for markets. We then turn to AI, examining how growing scrutiny of debt and cash flow could shape the sustainability of the AI trade. Next, we briefly cover a shift in US foreign aid policy, US tech firms’ cooling ties with China, and a cyberattack on a French bank. As always, we conclude with a review of recent domestic and international economic data.

Democrats Sweep: Following the midterm elections, Democrats have regained control of both chambers of Congress. Although several races remain uncalled, the party is on track for roughly 225 to 232 seats in the House of Representatives and a 54-seat majority in the Senate. This decisive victory will likely prompt a reevaluation of key national priorities, including foreign policy, federal investment in AI, and deficit-reduction strategies. That said, while markets prepare for political friction, we think common ground is possible.

• The election results confirm that the Democrats have won, though the scale of their victory remains unsettled. Several seats are still up for grabs as of this writing. Two Senate races, in Mississippi and Alaska, are too close to call, with the former leaning Democratic and the latter leaning Republican. With Democrats favored to gain more seats, they are likely to have greater sway over policy.
• The Republicans’ loss represents a major setback for the president’s agenda, as the Democratic victory is likely to slow legislative momentum. Calling for swift oversight, some lawmakers have already urged investigations into the White House. While these inquiries are unlikely to result in formal convictions or removals, they will create significant political gridlock and effectively block the passage of major, controversial legislation.
• The change in the composition of Congress is likely to shape several policy initiatives with implications for markets. In the run-up to the election, debate intensified over data centers and their energy demands, tariffs, and limits on the president’s authority to engage in foreign conflicts, all of which are likely to be addressed over the next two years. With the debt ceiling expected to be reached in 2027, lawmakers will also likely need to confront the growing deficit.
• Following the results, the White House may be more willing to work across the aisle than expected. President Trump has previously demonstrated a willingness to forge bipartisan deals when feasible, most notably with COVID-19 relief legislation and criminal justice reform, and we anticipate a similar approach moving forward. Nevertheless, investors should prepare for potential volatility stemming from fiscal deficit debates and the threat of a government shutdown.

AI Rally: AI hardware suppliers remain at the heart of the AI buildout. On Tuesday, two major AI suppliers issued strong outlooks, signaling that demand for specialized equipment remains high. This upbeat forecasts come as investor confidence in the broader AI rally has faltered amid fears that rising, debt-fueled spending could trigger a slowdown. Nevertheless, attention is increasingly shifting away from long-term sustainability doubts and back toward the robust, ongoing sales of core suppliers.

• AMD, a major chipmaker, and Super Micro Computer, a leading provider of AI server infrastructure, both delivered stronger-than-expected revenue guidance. AMD projected fourth-quarter revenue of approximately $17 billion, topping analyst estimates of $16.3 billion. Meanwhile, Super Micro raised its quarterly revenue forecast to $19.5 billion, significantly outpacing expectations. These impressive outlooks have reassured investors and helped ease fears of a potential AI spending slowdown.
• The performance of AI equipment makers has been viewed as a gauge of the AI rally’s overall sustainability, especially as weak results from cloud companies fuel skepticism. Over the past two weeks, Alphabet, Amazon, and Meta all saw their shares sink after earnings amid concerns that heavy spending, rising debt, and, in some cases, weaker results could hurt future profitability. Microsoft was the exception, with its shares initially rising after earnings on the back of solid revenue and positive cash flow.
• Debt and cash flow continue to be major themes for the AI trade. In recent months, cloud providers’ reliance on debt, particularly among hyperscalers, has helped drive cash flow higher for many AI suppliers. To keep its own revenue growing, Nvidia has started financing some of its sales to smaller cloud companies that lack the same ability to borrow. As a result, a slowdown in credit markets that prevents these firms from borrowing large sums to fund the buildout could weigh on the AI rally.
• The strong performance from AI equipment makers should help sustain the rally, but investors should not be complacent. Recent earnings show that markets are growing more skeptical about how much momentum the AI rally has left, which explains the volatility in recent weeks. Still, investors should not panic. As the saying often attributed to John Maynard Keynes goes, markets can remain irrational longer than you can remain solvent. Diversifying now is a prudent way to build in some protection in case sentiment shifts.

Foreign Aid: President Trump announced that the US plans to terminate military aid to Israel by the end of 2026. Although both nations had previously discussed a gradual phase-out of financial assistance, the sudden timeline came as a surprise to Israeli officials. The decision appears driven by political calculations ahead of the 2028 elections, as the president seeks to reshape his party’s platform and preserve Republican control of the White House.

China Crackdown: US tech companies appear to be scaling back their commercial ties with China. According to a report, Nvidia will fulfill just 1% of the RTX chip orders placed by its Chinese customers. While the company attributed the shortfall to strong demand, the move may also reflect a broader US push to prioritize American hyperscalers’ access to computing resources. Separately, Oracle reportedly faced White House pressure to cancel a $7 billion deal with Tencent for similar reasons.

New Cyberattacks: French bank Crédit Mutuel Arkéa recently confirmed a cyberattack in which hackers breached its systems to carry out unauthorized transactions. While the bank stated that the breach was under control and customers would suffer no financial losses, the incident highlights the growing frequency and severity of cyber threats facing financial institutions. The attack comes days after a massive breach at Binance that saw the crypto exchange lose over $6 billion in digital assets.

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