Investors are hoping for a year-end rally, but Barclays cautions that the midterm elections won't clear the gloom over the stock marketAI revenue and financing are the two mountains weighing on it.

Investors hoping the U.S. midterm elections will clear the way for a year-end stock market rally may be disappointed. The biggest forces weighing on the stock market right nowdoubts about artificial intelligence (AI) returns and the cost of financing its buildoutwill not be resolved by this election. After a difficult October pullback, Wall Street is increasingly viewing Election Day as a potential rally catalyst. But Alex Altmann, global head of equity tactical strategy at Barclays, believes the election is unlikely to change the fundamental issues driving recent market volatility. "The reason the Nasdaq is down 10% is not because of midterm election risk," Altmann said in an interview, adding that the pullback was driven more by concerns about AI financing and revenue trajectories. Election uncertainty, while a factor, played only a secondary role. Investors' initial reaction was positive. After Democrats won sweeping victories in Congress and Trump said he would accept the election results, U.S. stock index futures erased losses and turned higher, with easing uncertainty prompting investors to buy the dip. "The market almost universally expects the midterm elections to be a cathartic clearing event that allows investors to reposition for a nice 'Santa Claus rally' and a strong finish to the year," Altmann said. He also noted that although investors had already reduced equity exposure, leaving room to add back positions, there are few trading days left this year, and the Thanksgiving and Christmas holidays typically bring thinner liquidity. Admittedly, the election results could still affect tech stocksby increasing the likelihood of action at the state and federal levels to restrict AI buildout. Altmann said this is the most direct channel through which the midterm elections affect the AI trade. Take Texas, for examplewhere data center developers are seeking to build dozens of AI computing campusesstate Representative James Talarico won the state's first Senate seat for Democrats since 1994, and Gina Hinojosa was elected as the first Democratic governor in more than three decades. Those victories increase the possibility of tighter construction regulation, and Hinojosa repeatedly called for a moratorium on data center development during the campaign. Altmann said Texas matters because it accounts for about a quarter of projected data center construction. Even so, the broader debate around AI goes far beyond politics. Investors are also grappling with whether the massive investment in AI infrastructure can generate enough revenue, and how companies will finance that spending. "The two major drivers of the stock market right now are AI revenue realization and AI financing pressure," Altmann said, adding that neither issue is likely to be resolved in the short term. That leaves the market vulnerable to further swings in sentiment, especially because AI remains a long-term investment narrative whose ultimate returns are difficult to measure. "Everyone thinks the midterm elections are a short-term negative clearing event. But is that really true for AI? Probably not," Altmann said.