Stocks fell sharply last week as the Democrats won control of both the US House of Representatives and Senate at the midterm elections on Tuesday 3rd November. There are fears that they will use this control to restrict the build out of data centres, a fast-growing area of construction in the US which brings in billions in tax revenue and hundreds of thousands of jobs. A divided government can often be a relief for investors as major legislative changes become more difficult and, indeed, the initial reaction was positive with stocks rising on Wednesday 4th. However, sentiment shifted abruptly on Thursday 5th as investors priced in political backlash against data centres and Senator Bernie Sanders renewed his call for suspension of the entire AI build out. US stock indices fell 4.4% on Thursday, their biggest single-day decline since April 2025, when markets were rattled by the US tariff announcements.
We don’t believe that most Democrats are opposed to building more data centres, instead their concerns are their unpopularity with those who live near the sites alongside the associated rising cost of energy and the impact on household bills. Texas governor-elect, Gina Hinojosa, has already confirmed that every permitted data centre will finish construction – projects that are expected to run into 2028. In addition, new permits will not be banned but new approvals may be tougher as near-term political frictions are worked through, and Democrats use their bargaining power to protect costs for their citizens.
While violent market moves can be unsettling, we believe it is important to take a step back and focus on the underlying fundamentals, which remain supportive of equities. Recent earnings releases have reinforced the resilience of corporate profitability, while economic data continues to point to a robust economic backdrop. In our view, the volatility currently affecting equity markets is being driven primarily by sentiment and positioning, rather than any material change in fundamentals.
A range of short-term investors have reduced their market exposure, resulting in heavy selling flows over a short period of time which has caused a sharp decline. Hedge funds and systematic funds have been particularly affected, with rising volatility and data-driven models prompting reductions in stock market exposure. As selling pressure pushed prices lower on Thursday, this triggered further reductions in position sizes, creating a self-reinforcing cycle. Moves were further amplified towards the end of the trading day on Thursday as leveraged exchange-traded funds rebalanced. Therefore, our assessment is that the sell-off has largely been driven by technical factors and forced positioning changes, rather than a fundamental reassessment of the outlook.
Markets are volatile and we may see more sharp moves this week. However, history suggests that it is best not to panic. US stock indices are down 5.5% from their recent peak in early October but history shows that declines of more than 5% occur frequently, on average around three times per year. The chart below shows the return path for global equities over the twenty years to 30th September 2026, and the impact that missing the 10 best days or 20 best days would have had. Big down days and big up days often occur near each other; therefore, for long-term investors, we believe it is sensible to stay invested.
Source: LSEG Datastream, North Capital Management. As at 30 September 2026. All figures in GBP.
