Quick Take
The midterm elections brought significant changes in Washington and some sharp market swings, but economic growth, corporate earnings, and interest rates remain more important drivers of long-term investment returns.
Growing opposition to data center construction raises questions about the pace and profitability of AI investment, even as that spending continues to support economic growth.
Despite recent volatility and uncertainty, we remain constructive on the long-term outlook and believe diversified portfolios, disciplined risk management, and thoughtful rebalancing remain the best approach.
The midterm elections brought a significant shift in Washington, with Democrats winning control of both the House and Senate. The results set the stage for divided government during the remaining two years of President Trump's term. Markets responded with some sharp swings, particularly among technology stocks that have been leading the market in recent years.
While elections often attract considerable attention from investors, they rarely change the long-term investment outlook as much as the headlines might suggest. Economic growth, corporate earnings, interest rates, and business investment remain far more important drivers of market performance.
An unexpected development: opposition to data centers
One of the more interesting stories from the election was the widespread opposition to new data center construction. Across the country, voters supported local measures restricting or delaying these projects, reflecting concerns about electricity costs, water consumption, and the impact on surrounding communities.
This matters because the enormous investment in artificial intelligence infrastructure has become an important source of economic growth. Technology companies are spending hundreds of billions of dollars building data centers and acquiring the equipment needed to support AI applications. That spending has benefited semiconductor manufacturers, utilities, construction companies, and many other businesses.
The election results raise questions about how quickly that investment can continue. New restrictions could delay projects, increase costs, or shift construction to more welcoming communities. We expect investment in AI infrastructure to continue, but the pace of development and the financial returns from individual projects may look quite different from what investors currently anticipate.
AI investment and market expectations
Technology and AI-related stocks have contributed significantly to market returns over the past several years. More recently, however, investors have become increasingly focused on whether the enormous sums being committed to AI will generate the profits needed to justify current valuations.
Those concerns were evident in the market's sharp swings following the election. After an initial rally, technology stocks experienced a significant selloff, followed by a partial recovery. These reversals are a useful reminder of how quickly investor sentiment can change, particularly when expectations are high.
There is also an important distinction between the economic benefits of AI investment and the returns earned by shareholders. Spending on infrastructure can support economic growth, employment, and business activity even if the companies making those investments ultimately earn less than investors expect. A transformative technology does not automatically make every company associated with it an attractive investment.
That doesn't diminish AI's long-term potential. It simply reinforces the importance of valuations, diversification, and being selective about the risks investors take.
Keeping the bigger picture in focus
History offers a useful reminder that markets have performed well under both political parties and many different combinations of control in Washington. Policy decisions certainly matter, but investors have generally been better served by focusing on the underlying economy rather than trying to position portfolios around election results.
We continue to see reasons for a constructive long-term outlook, supported by business investment and technological innovation. At the same time, strong returns in certain parts of the market have raised expectations, leaving those investments more vulnerable to disappointments along the way.
For our clients, our approach remains the same: maintain diversified portfolios, pay attention to valuations and risk, and make thoughtful adjustments when opportunities arise. Market pullbacks can provide opportunities to rebalance or invest at more attractive prices, but they are not necessarily a reason to change a sound long-term strategy.
The political landscape has changed, and some of the assumptions supporting recent market gains are being tested. Neither development changes the value of a disciplined, long-term investment approach.
Contact us at 865-584-1850 or info@proffittgoodson.com
