Midterm elections expose market vulnerabilities! AI trades face tough scrutiny; US stock earnings expectations may see major adjustments.

The results of the US midterm elections and the subsequent market selloff have exposed the vulnerability brought about by excessively concentrated AI bets, and investors may need to readjust their expectations for investment returns. Friday's rebound was far from enough to make up for the largest market value wipeout in tech stocks since the COVID-19 pandemic. Although investors have stopped indiscriminately selling stocks, given the overall political environment and broader uncertainties, as well as the impact these factors may have on economic growth CKH HOLDINGS corporate earnings, increasing risk exposure again now requires considerable courage. Wolf von Rotberg, equity strategist at Bank Safra Sarasin in Switzerland, said: "Compared with a Democratic victory and its impact on data center construction, the underlying macroeconomic situation has already begun to change and is thereby dragging stocks lower. A rapid and substantial rebound in the market is unlikely." Short-term macro risks At present, the surge in volatility futures shows that short-term risk remains the market's primary concern. After last week's US stock market rout, investors have barely any breathing room, because the next major risk event will arrive almost immediately, forcing the market to quickly refocus on economic and monetary policy fundamentals. US October CPI data released on Tuesday will be the most important macroeconomic data this week. Core inflation readings for both August and September came in above expectations, so this latest inflation data will test whether underlying price pressures remain elevated and help the market reassess the path of interest rates. At the same time, the currently evident liquidity stress means financial conditions already look as tight as they were at the early stage of the Iran war in March this year. What the market needs most right now may be some easing in financial conditions. From this perspective, the election may have alleviated two factors that overheated the economyfiscal stimulus and unconstrained AI spendingbut did not signal a recession. Traders have already scaled back bets on a Federal Reserve rate hike in December. Falling US Treasury yields and a more moderate Fed stance will help ease the pressure on equity valuations and could potentially drive market leadership to broaden from large-cap tech stocks to a wider range of sectors. AI infrastructure investment faces scrutiny Compared with short-term macroeconomic and monetary policy changes, uncertainty surrounding the AI investment cycle itself may be the market's deeper concern. After the Democratic "blue wave" swept Washington, one of the biggest challenges investors face is judging where AI infrastructure construction will go next. The AI trade is now facing massive capital expenditures, overly crowded positioning, and increasingly difficult-to-answer questions about future investment returns. Barclays estimates that about 80% of utility companies' high-probability data center project pipelines reported for 2027 will be located in states with Democratic governors, compared with less than 30% this year. US President Trump has veto power, making far-reaching federal-level restrictions difficult to implement. However, the midterm election results at the state level have already directed market attention to physical infrastructure constraints, which are increasingly determining the actual pace of AI infrastructure construction. This means that even if federal-level policy restrictions are difficult to fully implement, issues such as state-level approvals, power supply, and grid access may also become important factors constraining data center construction. Joachim Klement, strategist at UK investment bank Panmure Liberum, believes that if hyperscalers slow capital expenditure growth as a result, the entire data center supply chain will face downward revisions to revenue and earnings forecasts. He said: "The message the market is sending us is that investors are exhausted, and not many new buyers are entering the AI trade." Last week, chipmakers became the core focus of investors readjusting expectations. Investors worry that stricter approval processes and higher grid access costs could delay orders into future years. For the Philadelphia Stock Exchange Semiconductor Index, this means a sharp adjustment in valuations, which are now close to the low end of the past 10 years' valuation range, and its entire valuation premium relative to the S&P 500 has also disappeared. Corporate earnings expectations may be revised down Uncertainty over the outlook for AI infrastructure investment may ultimately feed further into corporate earnings expectations. In the future, the market may need to re-examine previously overly optimistic earnings forecasts. The previous bull market was built on the expectation that AI capital expenditure and strong economic growth would continue to corporate earnings for years to come. In recent weeks, as doubts about the pace of AI deployment gradually emerged, investors have adjusted by compressing valuations. Next, analysts may also react, as they currently expect corporate earnings to grow 29% this year, followed by 19% and 16% growth in 2027 and 2028, respectively. Dario Perkins, managing director of global macro at TS Lombard, said: "The reason earnings at tech-related companies have grown so much is purely that US hyperscalers continue to pour record-scale funds into the AI ecosystem. In the long run, we are equally skeptical about whether the corporate sector can truly capture the benefits brought by AIwhether for the companies leading the construction of this new technology infrastructure or for end users, this problem exists." Dario Perkins believes there are three reasons for slower corporate earnings growth in 2027: the positive boost from higher energy prices will gradually fade; AI-related capital expenditure will slow; and the composition of US economic growth will shift back from productivity gains to employment growth. After a 20% valuation downgrade for the S&P 500, corporate earnings expectations may need to be readjusted Against the backdrop of possible adjustments to earnings expectations, investors also need to weigh two very different risks after the election. On the one hand, a slowdown in AI investment could curb economic growth CKH HOLDINGS inflation and push yields lower. On the other hand, a renewed escalation of tariff policy or intensified conflict between the United States and Iran could weaken economic growth while pushing up inflation, oil prices, and yields. Midterm elections usually lead investors to stop worrying about political factors and refocus on fundamentals. But this time, political factors and the investment cycle have collided directly. The election did not create the vulnerabilities the market currently faces, but it largely exposed them. Kristofer Barrett, head of global equities and fund manager at French asset management company Carmignac, said: "Once panic spreads, everyone rushes for the same exit." He noted that the scale of the selloff was largely driven by leveraged participants in the market. However, market concerns about the outlook for AI investment do not mean that relevant companies have begun to broadly cut capital expenditure. Hyperscalers are still investing heavily, and Kristofer Barrett has not yet seen any signs of slowdown among data center construction companies or chip manufacturers. He said: "At the same time, valuations have fallen sharply. If end demand for AI does not decline significantly, then current valuations look quite attractive."