The US midterm elections have delivered a decisive defeat for the Republican Party, with Democrats securing control of both houses of Congress. Their victory extended well beyond the traditional battleground states, including several areas that supported Trump comfortably just two years ago.
For financial markets, the result presents something of a paradox. Greater Congressional oversight could constrain some of the administration’s more unpredictable policies, particularly around trade and government spending. Yet US equities fell sharply in the days following the election, with the technology-heavy Nasdaq declining 5.5% on Thursday 5 November. Part of the explanation lies in a less widely discussed consequence of the election: growing political resistance to the expansion of artificial intelligence infrastructure.
AI’s next challenge may be political rather than technological
Several successful Democratic candidates campaigned against new data-centre developments, while local referendums also demonstrated opposition to their expansion. Concerns range from electricity consumption and water usage to the impact on local communities. This matters because the AI investment boom increasingly depends on the construction of enormous physical infrastructure, requiring substantial energy supplies and financing. Investors were already questioning whether the hundreds of billions of dollars being committed to AI would generate sufficient financial returns. Political restrictions introduce another uncertainty into those calculations.
There is an important distinction between the economic potential of a technology and the returns earned by those financing its development. History provides numerous examples of transformative innovations that ultimately delivered greater benefits to consumers and the wider economy than to some of their original investors. The recent correction therefore appears to reflect more than a reaction to an election. It has brought existing concerns about valuations, financing and the commercial returns from AI investment into sharper focus.
Inflation presents central banks with a difficult choice
The Bank of England increased interest rates to 4% last week, its first rise in more than three years. Governor Andrew Bailey warned that inflation could approach 5% in 2027 if the conflict in Iran continues to disrupt energy supplies. The difficulty is that higher interest rates cannot resolve the underlying supply constraints responsible for much of the recent inflationary pressure. They can, however, limit the extent to which higher energy costs feed through into wider prices and wages. Central banks must therefore balance the risk of persistent inflation against the economic consequences of maintaining higher borrowing costs.
The UK is not alone. Eurozone inflation reached 4% in October, while stronger-than-expected US employment figures have complicated expectations for the Federal Reserve’s next move. Some relief came from energy markets. Brent crude fell from approximately $112 to below $100 a barrel during the first week of November, following indications that negotiations might offer a route towards resolving the Iran conflict. The scale of that movement illustrates how sensitive the inflation outlook remains to geopolitical developments. A sustained easing in energy prices would reduce pressure on households and businesses, while giving central banks greater flexibility. Continued disruption would have the opposite effect.
Higher borrowing costs expose vulnerabilities in credit markets
Another consequence of persistently elevated interest rates is becoming apparent in parts of the corporate debt market. Yields on the lowest-rated corporate bonds have risen above 20% in Europe, while some heavily indebted businesses are finding refinancing increasingly difficult. These are borrowers already considered relatively high risk, rather than representative of the corporate sector as a whole.
Years of inexpensive borrowing encouraged companies and private equity investors to accumulate substantial debt, often on the assumption that favourable financing conditions would continue. As existing borrowing matures, some businesses are having to refinance at considerably higher rates. For companies with limited profitability or already stretched finances, this can create significant difficulties.
The pressure remains concentrated among weaker borrowers, with broader corporate financing markets continuing to function. Nevertheless, it demonstrates how the consequences of higher interest rates can take several years to emerge, particularly where businesses have previously secured long-term fixed-rate borrowing.
Economic change continues beyond the headlines
Alongside these immediate challenges, substantial structural investment continues across the global economy. The International Energy Agency expects global energy investment to reach approximately $3.4 trillion in 2026, with almost two-thirds directed towards renewable energy, electricity networks, storage, nuclear power and other lower-emission technologies. China’s carbon emissions also fell by an estimated 3.1% in the third quarter, supported by significant increases in electricity generation from solar, wind and nuclear power.
These developments illustrate the extent to which long-term changes in energy production, infrastructure and technology are continuing despite geopolitical uncertainty and higher financing costs.
What the recent developments tell us
The events of recent weeks highlight the increasingly complex relationship between politics, inflation and financial markets. The US election result has altered expectations for technology regulation, while the prospect of diplomatic progress in Iran has brought some relief to energy markets. At the same time, resilient US employment data has reinforced expectations that interest rates may need to remain elevated, and financial pressures are becoming more apparent among heavily indebted businesses. One consequence is that strong economic activity and positive technological developments do not necessarily translate into uniformly strong financial market returns. Valuations, financing costs and the expectations already reflected in asset prices remain equally important.
The broader economic picture is therefore neither uniformly positive nor negative. Growth and significant investment continue in parts of the global economy, but the cost of financing that growth, alongside political and geopolitical uncertainty, is placing greater emphasis on the financial strength and profitability of the businesses involved.
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Journey accepts no duty of care or liability for loss arising from any person acting, or refraining from acting, as a result of any information contained within this article. All investment carries risk. The value of investments, and the income from them, can go down as well as up and investors may get back less than they put in. Past performance is not a reliable indicator of future returns.