Midterms, Divided Government, and Tech Rotation
Recap
The U.S. held its midterm elections on Tuesday. The results shifted the balance of power in Congress, creating divided government, which is expected to stall legislation, particularly those affecting power-intensive AI data centers. Major legislation may become more difficult to pass, while recently approved measures could face revisions during implementation. See our recent commentary on the midterm elections. Divided Government: What It Means for Investors.
As investors assessed the impact, a sharp sell-off in AI and data center stocks sent the Nasdaq Composite and S&P 500 down 5.5% and 4.4%, respectively, on Thursday. The Cboe Volatility Index surged 69.7%, while the PHLX Semiconductor Index fell 12%. Five of the 11 S&P 500 sectors ended higher for the week, while the risk-off move pushed the 10-year U.S. Treasury yield from 4.93% to 4.86%.
Looking Ahead
Markets may remain volatile early in the week as investors assess how potential capex reductions over the next few years could affect earnings. While earnings estimates may be revised lower next season, attractive valuations could provide some downside support, with the S&P 500 trading at 18.5x forward earnings versus its 10-year average of 19.6x. As sentiment stabilizes, attention will shift to October’s inflation data. Core CPI and PPI expectations remain subdued, and in-line readings could significantly reduce the 77% probability of a December rate hike.
Market Watch
Source: Cetera Investment Management, FactSet. Total returns used, which include dividends and interest.
Chart of the Week: Job Growth Improving from Last Year
Job growth accelerated to 165,000 in October, topping expectations of 65,000, while the prior two months were revised up by a combined 84,000. The U.S. economy has added 861,000 jobs year to date vs. just 92,000 at this point in 2025.
Why Were AI/Data Center-Related Stocks Hit Hardest in Thursday’s Sell-Off?
Technology stocks have been under pressure for a while as investors worry that big tech’s heavy spending won’t convert into revenue and profits. A major cloud provider added fuel by missing revenue estimates and flagging rising costs after the close Wednesday. Thursday’s move combined that ongoing story with election dynamics around data centers, though the election results were widely expected and should have been largely priced in. We don’t think the buildout is dead, though it may slow as politicians look to regulate it.
Did You Know?
The Nasdaq-100’s 6.4% drop on Thursday was the largest daily decline since Mar ’20, leaving the index 14.7% below its October high. It’s the 7th drawdown of 10% or more for the index in the past 4 years.
Economic Calendar
Monday, November 9
No Major Releases.
Tuesday, November 10
NFIB Business Optimism Index, Consumer Price Index (CPI).
Wednesday, November 11
Mortgage Applications.
Thursday, November 12
Jobless Claims, Existing Home Sales.
Friday, November 13
Producer Price Index (PPI).
This report is created by Cetera Investment Management LLC.
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