by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with the latest on the conflict in Iran, where optimistic news about a possible ceasefire is being matched by a Republican lawmaker’s proposed resolution of impeachment against Defense Secretary Hegseth. We next review several other international and US developments that could affect the financial markets today, including the latest on the Nvidia scandal and a Federal Reserve official’s call for a big 50-basis-point hike in the central bank’s benchmark fed funds rate.

United States-Iran: Yesterday, Rep. Thomas Massie (R-KY) filed a resolution of impeachment against Secretary of Defense Hegseth for illegally bringing the US into its war against Iran without congressional authorization, among other charges. Under House rules, the resolution must be voted on by Wednesday. While most Democrats are likely to vote for the resolution, it isn’t clear whether enough Republicans will vote in favor for it to pass. If the resolution does pass, Hegseth would be subject to a trial in the Senate.

• In any case, the move may heap more pressure on the administration to cool its attacks on Iran. In turn, that could help push global energy prices lower, giving stocks a further boost.
• Meanwhile, both the US and Iran are reportedly continuing to stage sporadic, low-level attacks against each other as they try to degrade each other’s capabilities and undermine the other side’s will to keep fighting. Reports today say the US was forced to move some of its mid-air fueling aircraft yesterday from an air base in England to Germany and elsewhere after intelligence indicated the Iranians were planning attacks against the planes and their pilots.

United States-Nvidia-China: In the scandal involving Nvidia chief Jensen Huang and his affair with an alleged Chinese spy, new reports say a US Commerce Department probe into the smuggling of Nvidia computer chips by the woman’s company in Singapore was abruptly put on ice late last year. Along with other revelations about the affair, the shutdown of the probe suggests that Huang and sympathetic members of the US administration may have gotten the highest-level US decisionmakers to overlook national security concerns about Nvidia exports to China.

• As more details of the scandal dribble out, it increasingly appears that Nvidia will face a lengthy investigation and bouts of negative publicity about not just Huang’s personal conduct but also the firm’s role in potentially undermining US national security and gaining too much influence over the federal government.
• Such concerns are consistent with the new “techno industrial state,” which we described in our Economic and Financial Outlook for 2026 as the unusually deep, mutual support and cooperation between big technology firms and the federal government. Besides potentially making such tech firms more politicized and less efficient in the long term, the Nvidia scandal shows how the deep relationship could subject these companies to regulatory, reputational, and other risks in the near term.

US Monetary Policy: Fed board member Christopher Waller said at a conference in London that the central bank should consider a big 50-basis-point hike in its benchmark short-term interest rate if October’s core consumer price index — to be released today — shows another strong monthly rise. Even if the report shows cooler inflation, Waller said he would support another 25-basis-point rate hike to help ensure inflation keeps falling. The statements underscore the risk of further rate hikes and increased headwinds for stock prices in the coming months.

US Fiscal Policy: The Associated Press late yesterday finally called California’s Proposition 40, which would have imposed a one-time wealth tax on billionaires. The count so far shows 52.8% of voters rejecting the proposal versus 47.2% voting in favor. The defeat of the tax is likely good news for investors because it could take the wind out of the sails of any similar measures in other states or at the federal level.

US Regulatory Policy: The Food and Drug Administration yesterday said it will require Lilly, Novo, and other makers of GLP-1 receptor agonists to adopt product labels saying the medicines carry a potential increased risk of a rare but serious eye condition that can result in “acute, painless, decreased vision in one eye, including permanent vision loss.” The scary new warning labels could slow the use of the blockbuster drugs and weigh on the drugmakers’ revenues, profits, and stock prices.

Italy: In testimony before parliament today, the head of the Italian Banking Association warned that the 7 billion EUR ($7.8 billion) in tax hikes on the banking sector in the government’s draft 2027 budget would threaten economic growth. The pushback from the banking sector illustrates how the right-wing government of Prime Minister Meloni has been trying to balance its populist ideology with fiscal responsibility.

• As discussed in our new Bi-Weekly Geopolitical Report on right-wing governments in Europe, which was published yesterday, Prime Minister Meloni has generally favored reduced regulation and taxation on Italy’s corporate sector. However, she has also taken care to narrow the country’s budget deficit after it ballooned during the coronavirus pandemic.
• In our new report, we argue that Europe’s right-wing parties are likely to become more pragmatic as they come closer to seizing power. Many investors today seem to fear that their populist ideologies will lead to overly loose policy, but Meloni’s actions in government to date suggest that right-wing governments in places like France or Germany might adopt more fiscally responsible measures.

China: October exports were up 36% from the same month one year earlier, driven by strong foreign sales of items such as electric vehicles, semiconductors, and industrial robots. October imports were up an even stronger 41%, largely because of the need for foreign subcomponents and raw materials. The data means that China’s total trade surplus for the year to date is now more than $1.04 trillion. The full-year surplus in 2026 will therefore probably surpass last year’s record of $1.19 trillion — a development that will likely lead to further global trade tensions.

View PDF

by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with new signs that the US will hold off on launching new military attacks against Iran, reducing the risk of new energy-supply disruptions. We next review several other international and US developments that could affect the financial markets today, including an update on the race to succeed Christine Lagarde as head of the European Central Bank and the latest on the big scandal at artificial intelligence giant Nvidia.

United States-Israel-Iran: President Trump over the weekend said it was “highly unlikely” that he would launch extensive new military strikes on Iran, despite previous hints and a buildup of US forces in the region that indicated he was preparing for it. Of course, the statement may be misdirection meant to preserve surprise, but investors today are taking the statement as a sign of reduced risk. In response, energy prices are falling, with near Brent crude oil futures currently down 3.6% to $94.80 per barrel. The drop in energy prices is also helping give a boost to stock prices.

US Politics: President Trump on Friday said Deputy Chief of Staff Stephen Miller will take over as chief of staff, elevating a long-time loyalist and architect of his immigration crackdown. The move to replace the more centrist Susie Wiles suggests Trump may be gearing up for more ideological battles with the incoming Democratic majorities in the House of Representatives and the Senate. If so, it might portend more political and policy uncertainty, which would probably not be favorable for stock values.

US Labor Policy: Despite Miller’s elevation to chief of staff, President Trump said in a Sunday interview that his crackdown on immigrants may have been “too tough,” as officials deported “people that had good jobs.” He also offered to work with Democrats on an amnesty deal for migrants, adding, “There’s a large part of the country that think that they should be allowed to stay if they’re good people.”

• The president’s conciliatory statement on immigration, coming just after he named the immigration hawk Miller as chief of staff, suggests he is still deciding whether to approach the new Democratic majorities in Congress by doubling down on his policies or seeking compromise.
• In any case, if the administration eases up on its immigration raids, it might help job growth, but it could also put some upward pressure on the unemployment rate again.

US Artificial Intelligence Industry: After reports that Nvidia chief executive Jensen Huang has been having an affair with a woman believed to be an asset for China’s Ministry of State Security, the company said it will launch an investigation into the scandal. According to the firm, the probe will be run by a committee of outside directors assisted by outside counsel. The firm said it has no reason to believe either its secrets or national security were compromised, and it assured investors that Huang will stay on as CEO while the probe continues.

• Despite an apology by Huang and the board’s quick action in launching its investigation, the scandal will likely keep a cloud over Nvidia’s stock price in the near term. As of this writing, Nvidia is down 5.5% at $176.45 in extended-market trading.
• Importantly, once the Democrats take control of the House and Senate in the coming weeks, there will probably be a high risk of intensive congressional scrutiny into Nvidia and the implications of its business in China. Such investigations could also uncover concerns about other key US companies involved in artificial intelligence, putting a cloud over them as well.

Eurozone: In the race to name a replacement for outgoing European Central Bank President Lagarde, the Netherlands has nominated its former central bank chief, Klaas Knot, and Spain has nominated its former central bank leader, Pablo Hernández de Cos. Other contenders may still arise, but for now it appears that Knot and Hernández de Cos are the leading contenders. With Executive Board member Isabel Schnabel and Chief Economist Philip Lane also set to leave the ECB in early 2027, investors should brace for important changes in ECB monetary policies.

European Defense Industry: Reports today say a Dutch startup company, Onodrim, founded by former Palantir employees, has raised $300 million at a $1.3-billion valuation as part of its plan to build up Europe’s defense industrial base by buying critical suppliers and helping them grow. Even though some investors have cooled their optimism about European defense stocks as the region’s fiscal pressures threaten to slow the growth of military budgets, the establishment of Onodrim suggests the Europeans are continuing to look for ways to rearm.

Israel: On Saturday, President Herzog chose center-right politician Gadi Eisenkot to try to form a new governing coalition after the indecisive national election last month. Herzog’s decision reportedly reflects his talks with members of parliament, who believe Eisenkot would have a better chance of getting a majority of the new Knesset than Netanyahu would. Nevertheless, the political future in Israel remains unsettled, which could be a headwind for Israeli stock prices in the near term.

View PDF

by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment opens with a discussion of rising risks to data centers following the elections. We then turn to monetary policy, examining how the Federal Reserve may be insulated from potential changes to its Board of Governors. Next, we briefly cover a possible White House shake-up, the Paraguayan president’s resignation, and delays to a data center project in New Mexico. As always, we conclude with a review of recent domestic and international economic data.

Data Center Fears: Equity markets slid Thursday as anxiety grew that congressional changes could slow data center expansion. The S&P 500 experienced a sharp selloff with investors pulling back from the AI trade amid potential buildout disruptions. Paired with mounting worries about smaller cloud providers overextending on infrastructure debt, the pullback highlights rising skepticism over the sustainability of the AI rally.

• Political and regulatory uncertainty is casting a shadow over the AI infrastructure boom. Fears of structural construction delays, fueled in part by campaign proposals from several Democratic candidates to impose moratoriums on new builds, have led investors to push back expected operational timelines. In response to these rising risks, Microsoft has reportedly tightened oversight of projects managed by neocloud partners and is actively paring back involvement in higher risk developments.
• These infrastructure headwinds spilled into broader equity markets Thursday, amplifying jitters across the technology sector. The selloff intensified as Qualcomm joined the growing list of chipmakers offering cautious outlooks. Although Qualcomm beat fiscal fourth-quarter earnings and revenue expectations, its first-quarter EPS guidance fell below the midpoint of analysts’ estimates. The company’s share drop mirrors recent declines following Intel’s weak results, even as AMD offered a rare bright spot with a post-earnings rally.
• Political headwinds are compounding concerns that the AI rally is running out of steam. Pullbacks across the “Magnificent 7” highlight growing AI fatigue as investors become hesitant to pay steep valuation premiums. Notably, Nvidia’s price-to-earnings ratio has dropped to pre-pandemic lows. While the company’s core earnings remain solid, the contracting multiple reflects market expectations that hyper-growth will normalize over the next few years.
• Nvidia’s upcoming earnings report and Anthropic’s expected IPO will serve as crucial tests of AI sentiment. A strong earnings outlook from Nvidia could alleviate fears of a slowdown in infrastructure spending, while a successful public debut for Anthropic would reinforce investor confidence in AI as a long-term transformative technology. If both events deliver positive results, broader market sentiment could recover heading into year-end; conversely, any major disappointment risks exacerbating downside pressure this quarter.

Fed Safe? The midterm elections have reshaped the narrative around Federal Reserve independence. Once the new Senate is seated, the White House will no longer be able to count on confirmation for whomever it nominates to vacant seats on the Federal Reserve Board. This has eased fears that the administration might pack the Fed with loyalists — a prospect that had fueled worries the central bank would turn overly dovish. Although recent changes in Fed operations still point to a dovish tilt, the shift in the Senate suggests tighter monetary policy remains on the table.

• The chamber’s new composition will complicate any attempt to replace Fed Governors Lisa Cook and Jerome Powell — and, to a lesser extent, Michael Barr — with appointees more closely aligned with the administration. Even if the White House establishes legal grounds to remove them, their replacements would still require Senate confirmation, giving the Democratic majority an opportunity to block nominees perceived as too closely tied to the White House.
• Trump has long argued that the president should have a greater say in monetary policy and has repeatedly pressed the Federal Reserve to lower interest rates. Following September’s rate hike, he continued to target the central bank’s other policymakers rather than Chair Kevin Warsh, describing Warsh’s colleagues as “hostile” and “political.” His frustration underscores his broader push for greater influence over the central bank.
• The White House may face greater constraints on reshaping the Federal Reserve Board, but Warsh’s changes to the policy calendar could create a more dovish tilt. At the latest Fed meeting, Warsh announced plans to reduce the number of scheduled rate-setting meetings from eight to seven in 2027 and then to six the following year. Although the Fed can adjust rates between scheduled meetings, such moves would likely come in response to an emergency — circumstances that have typically favored rate cuts.
• Stronger constraints on White House influence over the central bank should bolster investor confidence in US Treasurys. The incoming Senate majority should restrict the White House’s ability to install allies on the Board, keeping rate hikes on the table. However, planned changes to the Fed’s schedule could act as a counterweight by reducing the number of meetings available to tighten policy.

White House Shake Up: Following the Republicans’ midterm defeat, the White House could face several high-profile departures. Secretary of State and acting national security adviser Marco Rubio is reportedly weighing an exit as he considers a 2028 presidential bid. Defense Secretary Pete Hegseth could also resign ahead of potential impeachment proceedings, which are rumored to have bipartisan support. Moving quickly to replace either official would allow Republicans to confirm successors before the next Congress takes office.

Paraguay Controversy: Paraguayan President Santiago Peña has resigned amid scrutiny of his ties to a failed commercial bank. He had already faced the threat of impeachment after the bank’s collapse left many Paraguayans unable to access their savings. His departure is a setback for US efforts to expand its influence in South America, as he had been an ally of the White House.

Oracle Data Centers: An Oracle-backed data center project in New Mexico faces further delays as its developer seeks the air-quality permit needed to expand on-site power generation. The facility’s use of natural gas requires state approval because of its emissions, complicating the construction timeline. Such delays could heighten investor concerns about some developers’ ability to repay their debt.

View PDF

by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment opens with our thoughts on the role that state governors could play in curbing the AI buildout. We then turn to national security, examining why the president might shift more attention abroad now that the midterms are over. Next, we briefly cover Moscow’s deepening ties with Iran, as well as the two Senate races that remain unresolved. As always, we conclude with a review of recent domestic and international economic data.

Governors and Data Centers: While financial markets have focused heavily on shifting power in Congress, changes in state governorships could prove just as consequential. Following the midterm elections, Democrats picked up five additional gubernatorial seats, bringing their total to 28. This shift comes at a time when local communities are pressing state governments to regulate data centers over concerns about their strain on public utilities. The change in party control has raised worries that stricter regulations may follow.

• While two gubernatorial races remain unresolved, Democrats are set to hold a majority of governorships for the first time in 16 years. The two contests up for grabs are in Kansas and Alaska, with the former leaning toward a Democratic victory and the latter heading toward a ranked-choice tabulation. Much of the party’s strong performance was driven by promises to address the rapid construction of data centers, a key issue that fueled Democratic wins in Texas, Ohio, and Georgia.
• Data centers had become a major issue in the months leading up to the midterms. Earlier this year, Maine’s legislature passed the first statewide moratorium on new large data centers, but the governor vetoed it, leaving New York as the first state to impose one. These pauses are designed to allow time to study the facilities’ impacts. Several other states, including Texas, which has one of the largest concentrations of data centers, have pursued similar measures.
• Even with the gains for Democrats in several gubernatorial races, the implications for data centers remain unclear, as moratoriums vary in scope from state to state. For example, Maine’s proposed moratorium would have had limited exceptions, while New York’s targets only new large data center construction, excluding projects already in the works. This variance suggests that while some construction may be paused, a moratorium does not necessarily mean an outright end to projects.
• Time will tell how Democrats will approach data centers, especially since the facilities have been a major engine of economic growth. Additional restrictions or moratoriums would likely act as a headwind to investment spending, at least in the near term. However, they are unlikely to end the spending spree altogether. That could change if restrictions raise project costs to the point where data centers become unprofitable, although there is currently no evidence that this is the case.

National Security Pivot: With the midterm elections concluded and opposition majorities set to control both houses of Congress, the president is expected to shift focus toward international affairs. Constrained domestically, his administration is likely to prioritize high-stakes foreign policy objectives: resolving conflicts in Ukraine and Iran and finalizing a trade deal with China. While such second-term pivots are common, the geopolitical stakes make this transition unusually high-impact.

• Following the midterm results, the White House will likely face tighter constraints on its authority. Having campaigned on rolling back key initiatives from the president’s first two years, Democrats are expected to target immigration enforcement policies and social benefit cuts. The administration’s judicial appointments could encounter fierce resistance as opposition lawmakers move to block further court stackings. Congressional investigations into several White House officials are also widely expected.
• Although Democrats may attempt to check executive power abroad, foreign policy remains a key arena where the Trump administration retains broad latitude. Presidents hold significant constitutional and statutory authority over national security, including limited military actions, trade negotiations, and tariff enforcement. These unilateral powers afford the president a critical avenue to define his foreign policy legacy despite legislative gridlock at home.
• Despite the president’s authority, the next two years of his foreign policy may be less disruptive to markets than the previous two. With the exception of his stance toward Europe, he is likely to take a lighter touch than before as he seeks to secure lasting deals. He has already signaled that he wants diplomacy to work regarding a deal with Iran, made strides to soften the US stance toward Moscow to help resolve the conflict in Ukraine, and appears set to establish a framework for a trade deal with China.
• The Democratic takeover of Congress may shift political volatility away from foreign policy and toward domestic issues as lawmakers gear up for the next election cycle. With a divided government, the White House could ramp up battles over the national deficit while dialing back more extreme foreign policy moves to win back moderate voters. If so, the next year should see more stable energy markets, providing a favorable backdrop for risk assets.

Moscow Deepens Ties: Over the last few years, Russia has provided continuous military support to Iran. A new report states that Moscow has agreed to supply Tehran with 90 missile launchers, despite facing ongoing setbacks in its war with Ukraine. While the delivery is not expected to be a game changer on the battlefield, the move suggests that the two conflicts are becoming increasingly intertwined. Russia and China’s involvement in Iran is expected to be a key topic of discussion when the parties meet at the ASEAN conference later this month.

Senate Races: Two US Senate races remain too close to call, with Democrats holding narrow leads in both Mississippi and Alaska. The Alaska contest, where the margin is roughly 700 votes, faces intense scrutiny following allegations that the race was influenced by an independent candidate who shares a name with Republican incumbent Dan Sullivan.

View PDF

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.

View PDF

by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment opens with market concerns surrounding today’s midterm elections. We then turn to geopolitics, examining early indications that bilateral talks between the US and Iran could resume in the coming days. Next, we analyze China’s move to tighten regulatory oversight of AI development, as well as broader market anxieties regarding the potential for massive AI-related debt to strain global financial systems. As always, we conclude with a comprehensive review of recent domestic and international economic data.

Midterms Preview: As voters head to the polls, the market is beginning to price in the possibility of a “blue wave.” Democrats are heavily favored to retake the House of Representatives, with growing odds that they may gain control of the Senate as well. This potential shift has raised concerns on Wall Street that Democratic control of Congress could impact the AI buildout, particularly as voters continue to voice reservations regarding data centers, energy demands, and AI safety risks.

• Democrats are heavily favored to win the House, but the Senate remains highly competitive. On Polymarket, traders give Democrats a 75% chance of a full sweep, with House control priced at a 94% probability. However, traditional polling presents a much tighter picture. According to RealClearPolitics, current projections show Democrats with 47 seats and Republicans with 44 in the Senate. Of the nine remaining toss-up races, only two feature a margin wider than three points.
• Recent polling suggests that the Democrats’ advantage may partly stem from voter pushback against data center construction. Growing worries over the high cost of the AI expansion and its impact on utility bills are routinely used to oppose local developments, fueling voter support for moratoriums on new data centers.
• Potential construction delays are seen as a significant threat to the AI buildout. Major tech companies have committed nearly $1 trillion to support this expansion, but moratoriums could curb investment and disrupt ongoing projects. Such a slowdown could also weigh on earnings for key beneficiaries, such as chipmakers, if demand for hardware falls.
• The midterms are expected to favor Democrats — at least in the House — though the market impact may remain limited. While some Democrats have campaigned on constraining data-center growth, bipartisan support persists for ongoing capital investment because of its broader boost to the economy. Consequently, any post-election selloff following a Democratic sweep is likely to be temporary, whereas an unexpected Republican victory would likely support equities.

Iran Progress: Iran and the US appear to be moving closer to negotiations over a potential deal. On Monday, leaders from both nations signaled a willingness to let diplomacy work as they seek agreements on reopening the Strait of Hormuz and reviving the nuclear deal. This pathway to talks remains open even as the US continues military strikes, though on a significantly smaller scale than the president had threatened in recent weeks.

• Optimism over an agreement has grown following the Supreme Leader’s decision to grant the Iranian government authority to enter negotiations. Tehran’s evolving stance suggests it is preparing to leverage its strategic position and is anticipating a likely weakening of Republican influence following the US midterm elections. This shift comes just a day after Iran indicated the possibility of reopening the Strait of Hormuz later this week.
• The White House is showing a willingness to let diplomacy work even as military strikes against Iran continue. On Monday, the US carried out a series of strikes on Qeshm Island, expanding an operation conducted over recent weeks and kept quiet to avoid signaling an intent to launch major combat operations. Addressing the situation, the president appeared to dial back his earlier threats of major strikes in Iran, making room for diplomatic channels to open.
• While talks appear to be moving in the right direction, there is no indication that further military action is off the table. Iran remains focused on tying peace negotiations to three key conditions: an end to the US naval blockade, the unfreezing of Iranian assets, and the easing of sanctions. Meanwhile, the US and Israel have been coordinating contingency plans to “drop the hammer” should diplomatic efforts fail to resolve the dispute.
• A resolution to the conflict remains far from guaranteed, but a breakthrough could provide vital support for equity markets heading into 2027. Restoring oil flows would help ease supply chain strains and lift global growth. Furthermore, falling energy prices should reduce inflationary pressures, lessening the need for monetary tightening. Conversely, any renewed escalation of the conflict would likely trigger the opposite outcome.

China Guardrails: Chinese regulators are working to establish safety guardrails to govern the development and application of AI. This shift toward tighter oversight reflects Beijing’s recognition of the cybersecurity threats posed by rogue AI. The initiative comes as AI models demonstrate an increasing ability to discover vulnerabilities and execute cyberattacks with minimal human oversight. Over time, there is a growing possibility that the US and China could establish a joint framework or agreement to regulate high-risk AI applications.

AI Debt Boom: There is growing speculation that AI financing demands could reach levels the market cannot absorb. According to PIMCO CEO Emmanuel Roman, capital requirements could hit $2 trillion annually over the next five years, potentially oversupplying the market. That risk would be especially acute in an economic downturn, which he warns could cause “something to break.” His remarks reflect mounting market anxiety over the financial system’s rising reliance on tech-industry debt and the risks it poses if left unchecked.

View PDF