What to watch in the week ahead

• The US midterms are likely to change the balance of power in Congress. Narrow majorities and presidential authority should constrain sweeping policy changes, and we would not treat the result as a binary directional event for markets.
• AI demand remains strong, but investors are placing greater weight on the risks of overinvestment, financing, and cannibalization. We remain constructive on AI and favor diversified exposure to high-quality beneficiaries over concentrated single-stock positions.
• The October US employment report, job openings, and business surveys will test the strength of labor demand and economic activity, and their implications for inflation and central bank policy. We expect the Fed to raise rates at a measured pace. Investors should maintain diversified equity exposure and add selectively to quality bonds.

What will the US midterm elections mean for markets?

The US midterms on 3 November will determine control of Congress at a time when investors are already focused on government borrowing, elevated bond yields, trade policy, and regulation. Our base case is that Democrats will control at least one chamber after the election. We assign a 50% probability to a Democratic sweep of Congress, a 40% probability to split control (Democrats win the House while Republicans retain the Senate), and a 10% probability that Republicans retain both chambers.
 

The most visible effects of a change in congressional control would likely be greater oversight of the administration and more difficult fiscal negotiations. Democratic control could soften or delay some spending cuts, while debt-ceiling negotiations in 2027 may create volatility and result in less fiscal tightening than currently expected. However, narrow congressional majorities and the president’s veto should limit the prospects for sweeping legislation. The president would also retain considerable authority over tariffs, foreign policy, and regulation. We do not expect a change in congressional control to derail data center expansion, since many relevant decisions are made at state and local levels.
 

So, we would not treat the midterms as a binary directional event for equities, bonds, or the dollar. The election result may affect the path of fiscal negotiations and generate near-term volatility, but economic growth, corporate earnings, AI investment, inflation, and interest rates should remain more important market drivers. We continue to expect Treasury yields to settle slightly lower over the next 12 months, as easing inflation should ultimately prove more powerful than persistent fiscal concerns. Investors should avoid positioning portfolios around one political outcome and instead remain diversified across durable sources of growth and income.
 

Can earnings sustain the AI trade as investors demand clearer returns?

US technology stocks came under pressure last week as investors questioned returns from the AI buildout despite strong earnings. The Nasdaq Composite fell 2.9% on Friday and 2.0% over the week, while the S&P 500 declined 1.8% and 0.6%, respectively.
 

The results nevertheless reinforced the strength of AI demand. Google Cloud revenue rose 103% year over year, Microsoft Azure grew 48%, and Oracle’s growth accelerated to 62%. Microsoft also reported an eightfold increase in large Copilot accounts, while Alphabet said Gemini had reached 1 billion users. But investors are placing greater weight on overinvestment, financing, monetization, and cannibalization risks. Alphabet maintained its USD 195-205bn 2026 capital-spending plan, reported negative quarterly free cash flow, and indicated a further increase in 2027. Meta raised the lower end of its 2026 spending range to USD 135-145bn. This week, investors will watch further quarterly earnings reports, including from Apple.
 

The recent concerns do not point to a broad retreat from AI investment. The financing of neoclouds, specialized computing infrastructure providers whose primary business is renting out GPU capacity, has been a particular area of investor concern. But neoclouds account for only around 8% of our capital-spending estimate, compared with roughly 80% for Alphabet, Amazon, Microsoft, Meta, and SpaceX. This makes select delays, repricing, and consolidation more likely than a collapse in spending. At the same time, slower monetization in existing businesses shows that rapid adoption does not automatically translate into equally rapid profit growth.
 

We have raised our aggregate AI capital-spending forecasts to USD 1.0tr in 2026 and USD 1.4tr in 2027, and introduced a USD 1.5tr forecast for 2028. We remain constructive on AI, but the performance bar is rising. Investors should favor financially strong platforms and high-quality infrastructure providers, reduce excessive single-stock concentration, and diversify across sectors and regions. Diversified AI stock selections, active strategies, and, where appropriate, structured strategies can help spread exposure across the AI value chain and manage volatility.

Will global data keep rate expectations in check?

The Federal Reserve and European Central Bank both kept rates unchanged last week. The Fed upgraded its assessment of growth to “strong,” and two policymakers favored a 25-basis-point increase. But Chair Kevin Warsh struck a more dovish tone, citing improving inflation expectations and tighter financial and credit conditions. He also noted that strong capital spending is broadening beyond high-tech investment. Futures continue to indicate close to three Fed increases over the next 12 months. We think this is too hawkish and expect 25-basis-point increases in December and March.

Purchasing managers’ indices will indicate whether manufacturing and services remain resilient and whether higher energy and input costs are spreading into broader prices. Eurozone inflation will show whether the recent acceleration remains largely energy-driven or is becoming more evident in underlying inflation. In the US, job openings and the October employment report will provide fresh evidence on labor demand, payroll growth, unemployment, and wages. The Bank of England also meets on Thursday. Accelerating UK services and core inflation support our expectation of a 25-basis-point rate hike. Together, these releases and policy decisions will help shape expectations for the timing and extent of further central bank tightening.

Moderate US employment growth, contained underlying Eurozone inflation, and resilient business activity would support gradual tightening. Stronger price pressures or renewed momentum in growth and employment could push rate expectations higher. But we do not expect measured tightening to derail the economic or equity outlook. Robust earnings, an improving industrial cycle, and resilient consumption should help equities absorb moderately higher rates.
 

Investors should maintain diversified equity exposure and add selectively to short and medium-duration high-quality bonds, while remaining cautious on the longest maturities and lower-quality credit. We continue to rate fixed income as Attractive, with quality bonds offering income and potential portfolio diversification. High-quality bonds rallied last week as equity markets came under pressure, with the 10-year US Treasury yield falling to a seven-week low of 4.93%.