Market selloff: Tapping the brakes on a runaway train

The post-midterm equity market selloff reflects shifting sentiment and the new political reality forcing a reassessment of valuations based on higher uncertainty and lower visibility. If the rally immediately following the midterm election results was focused on the silver lining of slower data center capex, the steep decline later in the week was decidedly not.

Still, we remain within the S&P 500’s roughly 500-point trading range between 7300 and 7800, which has persisted over the last six months.¹ Valuations have moved notably lower in recent days, but they’ve been compressing for about a year, which is a healthy development.

Exhibit 1: S&P 500 valuation reset

As of November 5, 2026. Source: Bloomberg

The macro backdrop remains solid heading into 2027, and earnings estimates have held up better than prices. The October nonfarm payrolls labor report released on November 6 showed not only continued strength but also broad-based evidence of supportive economic fundamentals.

The corporate fundamental and earnings backdrop also remains supportive. Reported earnings so far have shown 13% sales growth and 27% earnings growth, which are modest surprises relative to expectations, and estimates for 2026 and 2027 continue to be revised higher.²

There’s nevertheless an emerging question of whether we're moving into the later stages of the earnings cycle if a smaller or slower AI expansion impacts profits. AI compute demand remains insatiable in the near term, but investors are reassessing the pace and profitability of the AI buildout, particularly in light of the midterm election outcome.

Greater scrutiny of AI capital spending amid changing policy priorities

Investor skepticism has been increasing for months over unrestrained capital spending, financing and returns on invested capital, which has been captured in softening valuations. Those concerns are now being amplified in the wake of the midterms as political and policy concerns about AI and data centers move from the background to the foreground.

Our base case remains a slower, more selective buildout, not abandonment. AI capex had taken on the momentum of a runaway train and this week’s developments are expected to slow it down. This is about a change in expectations, not an immediate shock, regarding moderation in the pace of infrastructure investment rather than a reversal or retreat.

Delays can pressure individual companies, while reduced competition for power, labor and financing could ease inflationary pressure and help existing projects reach completion.

Anticipated growth still depends on sustained investment and timely capacity additions. We are monitoring whether concerns about timing and valuations translate into weaker orders, spending commitments and earnings.

Rotation, positioning and implications

Investors may now be exaggerating downside risks after emphasizing the upside possibilities. There's been reporting that hedge funds have been significantly scaling back their positions, which is consistent with a momentum unwind. Crowded positioning can amplify legitimate concerns, but the intense AI-related adjustment is not necessarily indicative of broader market conditions. This move still fits the description of an extended consolidation.

While volatility and dispersion have increased substantially, the selloff has not exhibited the characteristics of a systemic or credit event. Concentrated AI exposures and balanced portfolios are experiencing different outcomes, with the latter barely registering declines given the rally in fixed income yields. We are monitoring liquidity, credit conditions and whether weakness spreads beyond the most exposed companies.

Opportunities beginning to surface

Our focus remains on high-quality companies, meaning balance-sheet strength, durable demand, cash generation and disciplined capital allocation. Runaway speculation hasn’t favored these types of companies, but we believe they’re moving back into favor as froth exits the market.

Companies funding investment from a position of strength are better placed than leveraged developers. Lower prices become more compelling when the earnings supporting them remain resilient.

Investors have been navigating an AI-on/AI-off dynamic since the beginning of 2026. We’ve clearly re-entered an AI-off period, but we do not believe it has progressed to AI-over. Looking forward, the opportunity is to identify durable earnings at more reasonable valuations, which have already reset to the lows associated with the most prominent selloff catalysts of the last few years.