Today
Americans head to the polls today for the midterm elections. Control of Congress is at stake, with all 435 House seats and about one-third of the Senate up for election. Republicans currently hold control of both chambers, giving Trump greater latitude to advance his legislative agenda. Polls point to a potential Democratic takeover of the House, while the Senate remains more competitive, with races in Texas, Michigan, Iowa and Alaska among those being closely watched. For investors, the outcome will help determine whether Trump can advance his plans on taxes, spending and regulation or faces a divided Congress that could constrain his agenda. Regardless of the outcome, history has generally favoured stocks in the year following midterm elections, although the immediate focus is on the selloff in tech shares. The Nasdaq 100 entered correction territory yesterday, down -10% from its October peak as investors reassessed the sustainability of AI spending. Earnings have done little to turn the tide, with Apple trading lower in premarket trading following its latest results, while Palantir is also under pressure despite reporting 96% revenue growth and more than doubling its quarterly profit. Even those numbers have left investors wondering whether Palantir can sustain such rapid growth. Canadian futures are leading this morning’s decline, down over -1% at the time of writing, after the TSX led gains yesterday.
If history is a guide, U.S. equities could see a post-election rebound, with the S&P 500 seeing an average return of 13.7% in the year following the 11 midterm elections since 1982, and posting positive returns in every instance. Markets have historically performed well under a divided government, with the index averaging a 15% gain over the subsequent year when control of Washington was split between parties, compared with an 11.5% average gain under one party. This trend is often attributed to reduced policy uncertainty and a lower likelihood of significant legislative changes. Short-term market reactions have been less predictable, with the S&P 500 averaging gains of approximately 0.2% in the first day and week following elections and 1.1% over the first month across presidential and midterm elections. Despite the favourable historical seasonality, strategists emphasize that Fed policy, corporate earnings, and broader economic conditions have historically been more influential on market performance than election outcomes.
Inflation is making its way back into corporate earnings discussions, with references to inflation and cost pressures during S&P 500 Q3 earnings calls expected to exceed 1,100, representing the largest YoY increase since the inflation shock of 2022. The renewed pressure is being driven mainly by elevated energy prices, although there is also stronger-than-expected underlying inflation, creating challenges for companies attempting to pass higher operating costs on to price-sensitive consumers. Consumer-facing businesses appear the most vulnerable, although there is evidence of margin compression across the broader market, as only 58% of S&P 500 companies have exceeded third-quarter net profit margin expectations, one of the weakest results since late 2022, suggesting corporate pricing power is deteriorating. Although some companies continue to show resilience through positive sales volumes, the combination of higher living costs, elevated borrowing rates, and declining equity markets could begin to undermine consumer confidence and spending. This comes after the Fed signaled that additional monetary tightening may be necessary, with interest rate markets fully pricing in another increase by January, raising the prospect of further pressure on economic activity and corporate earnings.
China’s export engine may be losing some steam, as October manufacturing surveys showed an unexpected slowdown in orders, raising questions about the sustainability of the country’s export-dependent growth model. Net exports accounted for nearly 40% of China’s Q3 GDP growth, helping offset continued weakness in household consumption, employment and the property sector. Although manufacturing output expanded at its fastest pace since April, business confidence softened and employment growth weakened, while rising input costs relative to selling prices continued to pressure corporate profit margins. Economists believe additional policy support may be needed to reach Beijing’s 4.5%–5% annual growth target, although authorities have so far favoured targeted measures rather than broad-based stimulus.
France’s fiscal troubles are putting pressure on European markets. Political gridlock, resistance to spending cuts, and rising borrowing costs are adding to doubts about the country’s debt sustainability, with 10-year government bond yields exceeding 5% and some expecting continued pressure on French bonds and equities ahead of the 2027 presidential election. Broader European contagion is also becoming a concern, especially for Belgium and Italy, where elevated debt burdens and fiscal deficits are contributing to widening bond spreads, while Spain’s November 29 election represents another potential source of market volatility. Economists expect the ECB to remain reluctant to intervene unless financial stress spreads significantly, leaving European sovereign bonds, banks, and the euro vulnerable to further repricing, with elevated energy costs and social unrest complicating the picture.
CPP Investments is becoming more selective about financing AI projects, with global head of credit David Colla describing parts of the market as “bubble-like.” The pension fund, which manages $863.6 billion, continues to finance AI projects, including CoreWeave, although AI accounts for just 3.5% of its credit portfolio. Colla pointed to circular financing arrangements, where tech giants invest in companies that also buy their products, creating overlapping exposures that could magnify losses if projects fail. He also questioned the use of off-balance-sheet debt to finance data centres and the lack of transparency among private AI developers. The pension fund is finding opportunities elsewhere in credit markets, having purchased over $3 billion in discounted loans and bonds during a recent selloff. It is also expanding into fund financing, which allows private equity funds to borrow against their existing investments rather than sell them to raise cash. Colla believes CPP Investments’ experience in evaluating the assets backing these loans puts it in a good position to negotiate attractive lending terms, with recent European financing deals offering yields of 4% to 5% above benchmark rates.
Hackers are finding new targets, and apparently even supermarket refrigerators aren’t off limits. Hundreds of French supermarkets have been targeted by cyberattacks on commercial refrigeration systems, while unexplained refrigeration issues at several U.S. military bases are also under investigation. In France, hackers manipulated controls to raise temperatures above 122°F, spoiling food, causing fires, and creating huge financial losses. The Pentagon is investigating similar outages that occurred in August at more than half a dozen U.S. military bases, although authorities have not determined if those incidents were cyberattacks. French cybersecurity authorities identified vulnerabilities involving internet-connected refrigeration controllers running outdated firmware, highlighting how easily exposed businesses are to coordinated attacks. Cybersecurity experts warn that the growing connectivity of industrial equipment, combined with more sophisticated hacking capabilities, is expanding the range of potential targets beyond traditional computer networks.
Diversion:
Now play Wonderwall!
