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US stock market rotation broadens beyond AI after Democratic sweep

A Democratic sweep in the US midterm elections will create a stock picker’s market as the focus moves away from AI, Robeco’s experts predict.

執筆者

    Head of Multi Asset & Equity Solutions, Co-Head Investment Solutions
    Director of Global Markets Research

まとめ

  • Widening of stock market away from AI is good for stock pickers
  • Corporate earnings underpin equities, but volatility seen in bond markets
  • Data center fears trigger tech plunge though AI investment thesis is intact

The Democrats’ landslide victory taking control of both houses of Congress was dubbed a blue tsunami, or ‘blunami’, after the party’s color and the scale of the win over the rival Republicans, the party of President Donald Trump. However, tech stocks plunged two days later, amid fears that they will legislate to rein in the construction of new AI data centers, before later recovering.

While such a correction unnerved investors, a weakening of ‘big tech’ domination is a positive as the wider market offers rich pickings for active asset managers, says Mike Mullaney, Director of Global Markets Research at Robeco’s sister company, value investing specialists Boston Partners.

“The two key themes that we're looking at are that you're going to continue seeing market rotation and a greater dispersion of returns,” Mullaney said in a webinar on 5 November to discuss the election results with Robeco’s Head of Multi-Asset Solutions, Colin Graham. “The market continues to broaden out away from just this AI tech sector rally that we've seen.”

“And the dispersion is going to be a good thing because I think it's going to be very much a stock picker’s market as far as looking for the winners and losers within each sector. I’m still basically fine with the stock market doing well over the intermediate to longer term.”

“I just think it's going to be much more of a market where you don't have to just focus on one sector, that being technology and in particular, big tech.”

US midterm elections 2026: What the results mean for investors

Stocks versus bonds

He says the underlying strength of corporate earnings underpins stocks, though the bigger worry might be volatility in the sovereign bond markets, as yields on US Treasuries continue to hover over 5%. Bond yields rise as investors demand a higher premium for holding government debt, as US budget deficits and the USD 40 trillion national debt continue to soar.

“The second quarter was a blow-out earnings season; earnings are still growing very strongly – not just in the US, but everywhere,” he says. “It's just that the US is growing faster. And if you look at what's happening, you're seeing a derating of stocks because prices have gone up a bit, but earnings have gone up much faster. So, stocks are actually cheaper now than they were a year ago.”

“Individual stock volatility has increased relatively dramatically and that creates opportunity. So that's good. Crossing over asset classes, I would watch the bond market because volatility there has crept up. And there's actually a relatively wide dispersion between the implied volatility of the bond market versus the implied volatility of the stock market.”

“I think that ultimately, you're going to have higher volatility in general because overall volatility from the stock market is probably going to gravitate toward that of the bond market. The bond market might be in control on a near- to intermediate-term basis as far as the overall level of volatility in the markets.”

Two fundamental pillars

Mullaney says investors can always fall back on two factors when this kind of volatility arises. “The two primary drivers of stock prices over time are earnings and interest rates and so whenever the horizon looks clouded to me, I always focus back on those two big factors,” he says.

“Earnings are basically lifting all ships in the stock market at this juncture. And while we think interest rates will be higher for longer, we don't think they'll be at levels which will completely suppress and contract the price-earnings multiples of stocks.”

“We think it's basically doable. We've already seen that right now a 5% 10-year Treasury yield has not inflicted that much damage on the stock market.”

Sharp reassessment of capex

What did damage the stock market was a belief – albeit temporarily – that the AI boom is now over, triggering a sharp drop in AI-related stocks on 5 November before they recovered some of the ground on 6 November. Tech companies remain responsible for much of the stock market’s double-digit returns over the past two years.

Investors need not worry about the underlying thesis that has powered the AI boom, says Graham. “The scale and concentration of the decline indicate a sharp reassessment of the AI infrastructure trade rather than a broad deterioration in corporate fundamentals,” he says.

“We can accept that capital expenditure is likely to be lower under the Democrats, and that implementation will take longer in the future. This theme actually started a few months ago, when third-quarter earnings came into focus, and the credit markets also flagged a likely slowdown. Then the election results provided the catalyst for the sudden drop.”

Strategic AI theme is intact

“The investment implication does indeed favor the further broadening of the stock market away from the tech sector, but investors should avoid chasing the anti-AI trade after the collapse. Market positioning in these stocks has remained in place although volatility has clearly risen.”

“The strategic AI thesis remains intact, but the market is now demanding clearer evidence that extraordinary capex, which has now run into hundreds of billions of dollars, will translate into sustainable cash flows and returns.”

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