As we’ve discussed frequently, AI and data center stocks have been carrying most of the market’s water for quite some time. Depending on how you measure it, the industry has been responsible for 50-80% of the upside. Yesterday, we saw how susceptible the market is to problems in the sector.

SPX plunged 4.36%, coming within a few points of our first downside target.

COMP plummeted 5.5%, dipping into official correction territory.

The euphoria of the previous session and the breakdown in oil prices…

…was smothered by the fear of a moratorium on data centers that we discussed just yesterday.

 

Following the blowout midterm victory for Democrats, it’s hard to overstate how much everything will change in the global economy, the geopolitical scene, and the markets. The question is “when?”

That particular question will depend on whether Trump reads the room and goes quietly, or throws a fit and obstructs the many changes that lie ahead. Personally, I expect him to step down at some point, probably very soon, for health reasons. Stepping aside might permit a Nixonesque negotiated avoidance of impeachment – though the disgorgement of ill-gotten gains would be a sticky issue.

It would be wise for the Democrats to avoid pissing off Trump’s considerable base, as their own approval rate is nothing to write home about. And, they have botched plenty of elections over the past few cycles. Perhaps they’ll be satisfied with impeaching Hegseth and a few other cabinet members.

The Iran War

In any case, there are substantial changes afoot following the midterms. Perhaps the biggest potential change is the war on Iran. Though the Democrats have denounced the war, they don’t have the power to end it. The June resolution directing Trump to withdraw is symbolic and doesn’t bind Trump to cease action.  They can, however, end any additional funding.

The White House has asked for $88 billion in supplemental funding, which has been stalled and will likely be killed while the war remains unauthorized by Congress. If America’s depleted weapons stockpiles can’t be replenished, things will grind to a halt PDQ.  This is the Dems’ strongest lever.

A funding cutoff like in 1973 could easily be passed by Congress, but would only survive a threatened veto if attached to must-pass legislation to avoid a shutdown.  And the Pentagon is already the recipient of $840 billion courtesy of the 2026 Defense Appropriations Act and has north of $100 billion already on hand.

One aspect of the market which is already seeing an impact is oil. Iran kept the pressure on, and it showed up at the ballot box. Yesterday’s post-midterm breakdown confirmed their plan.

The AI Industry

Another aspect is the AI trade. Over the past four quarters (Q4 2025 through Q3 2026), the AI and data-center buildout accounted for about 40–50% of US real GDP growth before subtracting imports, and about 20–37% after. The commonly cited middle estimate is about one-third. Its share of the economy’s size is much smaller: about 0.8–2% of nominal GDP, depending on how broadly “AI” is defined. Its share of nominal GDP growth is roughly 15% even before subtracting imports.

Two things to watch next: the Q3 second estimate on Nov 25, since advance estimates of September imports are often revised, and the Q4 capex numbers. The sharp swings between quarters (0.14 pp net in Q4 2025 versus 0.73 pp in Q1 2026) mostly reflect when imports arrive, not changes in the pace of the buildout. Like the war on Iran, however, much will depend on Congress’ success in slowing the pace of growth.

The data centers that feed AI need a lot of energy. Most consumers aren’t anti-AI per se, but higher electricity rates affect Democrats and Republicans alike.  Members of Congress surely heard this loud and clear on Tuesday. Can/will they do anything about it? And, if so, will Trump fight them or go along?

The Artificial Intelligence Data Center Moratorium Act introduced in March would block new construction and major upgrades of AI data centers until Congress passes federal AI safeguards. It would also ban US exports of AI computing infrastructure to countries without equivalent safeguards.

With Trump’s support, a moratorium would knock 0.6-1.5 points off real GDP (currently around 2.5%.) If instead he vetoes it, the hit is more like 0.2-0.4 points.

continuing...

 

Voters repudiated Trump’s vision of America, with special emphasis on the cost of living, military adventurism, authoritarianism, and corruption.

There will certainly be winners and losers. But, it will take a while to sort it out, as not all Democratic initiatives will be advanced or passed. Trump has promised to veto many of them. And, the Dems are neither unified nor beloved. If they don’t accomplish any more than the Republicans, they’ll be turned out just as quickly.

Meanwhile, the initial overnight downturn has reversed and futures are up nicely after coming up short of our SMA200 target overnight.

continued for members…

It would be a mistake to miss the opportunity to tag the SMA200 while it’s within reach. Whether it gets bounced off of or dropped though will depend on many things – some of which Congress will be able to influence, and some of which they won’t: inflation, interest rates, the Iran war, tariffs and Fed operations to name a few.

The first big test for the markets is whether the 10Y can hold its trend line.

And, of course, we’ll continue to keep a close eye on oil. Allowing it to drop through the most recent TL of support would be a nice gesture by the Iranians…  Will Trump still ramp up the bombing campaign?

Stay tuned…

The midterms are finally here. Futures are slightly higher, but the calm is unlikely to last.

About the only potential bright spot in the equity markets is COMP, which has nearly reached our target at the confluence of its SMA200 and the TL from Apr 2025.

While markets almost always rally after midterms, the current technical picture is decidedly bearish. And, the factors that have propped up stocks for the past two years are under assault.

Oil prices are one obvious pressure point. While CL has not yet made new highs, it seems likely that the Iran war will ramp up again. Since it broke out on Sep 1, CL has managed to withstand repeated attacks, refusing to break down.

This has ensured the 10Y’s continuing rise…

…though RB is currently showing some weakness.

continuing…

Futures are moderately higher this morning in the wake of Friday’s meltdown and on the eve of historically consequential midterms.

While Democrats are almost certain to take back the House, the odds of Senate control are much closer: ranging from 60 – 80%.

Should Dems win both, look for markets to do even worse than last week. The current administration has been extremely friendly to business, particularly big business. But, it’s been quite mixed and much will depend on what happens with oil/gas prices which remain stubbornly high and will go higher if reports of a ramp up in military action in the Middle East are true.

 

Ten years ago, I began charting the implications of rising US debt and interest rates. The first chart I put together in 2016 contemplated what would happen if falling interest rates ever stopped falling in the midst of increasing debt levels.

By the time I started posting these, it wasn’t a hypothetical any more.  From Inflation Games in 2019:

Little did we know that rates would fall even further in 2020 due to the pandemic. Here in 2026, the drop seems almost insignificant as rising rates, debt levels and interest expense subsequently went vertical.

Taking two very mild CBO forecasts into account, the 2036 picture looks bleak.

Another way of looking at the problem of rising rates and increasing levels of debt: the share of the federal budget consumed by interest expense.

Interestingly, interest rate increases in this scenario are no longer the problem. The problem is the rising debt, required in order to pay the interest on the very same rising debt. It’s a problem that every consumer who ever took a cash advance from VISA to pay their AMEX bill can appreciate.

If there’s a canary in this particular coal mine, it’s probably the falloff in official foreign ownership of US treasuries.  As Bloomberg pointed out yesterday, US-friendly nation slashed their ownership by 60% as of August 2026.

Countries and regions most aligned with the US bought a net $174.3 billion of Treasuries, excluding bills, in the first eight months of 2026, according to an analysis of Treasury and State Department data. That was the lowest for the period since 2021 and down more than 60% from a year earlier.

The shift is noteworthy in Asia, where economies running large surpluses are putting less of that money into US debt. Japan, the biggest foreign holder of Treasuries, bought just $389 million in the first eight months — down 99% from a year earlier. South Korea sold $23.8 billion, the most for the period in records going back to 1977. Taiwan was also a net seller.

While past dips in foreign ownership was attributable to countries defending their currencies, the latest has come amid US dollar weakness. Some countries have diversified into gold, driving holdings to $4 trillion, exceeding US treasuries ($3.9 trillion) for the first time in 30 years. Others have moved their treasury holdings from the NY Fed to Euroclear in Brussels, beyond US reach. But, a significant share represents net selling by foreign central banks in the wake of Trump’s tariffs and, just maybe, their justifiable concerns about the explosion in US debt.

 * * * * *

Futures are off sharply this morning.

 

continuing…

Lots of economic data out this morning…

The PCE price index increased at 0.5% MoM and 3.6% YoY.  Excluding food and energy: 0.3% and 3.1%. GDP grew at 3.4% and consumer spending grew 3.8% in the third quarter. All in all, the data calls into question yesterday’s Fed decision to sit on its hands.

Meanwhile…

GOOGL and CAT are both weighing on the futures.

Stay tuned…

Pretty much according to script except for the two dissents calling for a rate hike.

Futures are backtesting the SMA10, which has now passed below the SMA50 in addition to the SMA20. It’s normally a clear sign of an impending downturn. With tomorrow’s FOMC decision expected to be a non-event and the midterms just one week away, this is likely the calm before the storm.

WTI futures are similarly pausing after news of a diplomatic sit down involving Iran, Saudi Arabia, Turkey and Pakistan.

DXY continues to firm ahead of tomorrow’s FOMC decision. It will be interesting to watch Warsh repeatedly deny that the Fed is pausing another rate hike for political purposes.

As we’ve discussed in the past, the Trump administration obviously wants a smooth next week with all-time highs in the stock market to engender the kind of warm and fuzzies that will enable Republicans to retain control of Congress. This means a pause in the war on Iran, followed by an all-out, punishing blitzkrieg as soon as the midterms have passed.

Iran, which has maintained effective economic pressure through higher oil/gas prices, would rather not be annihilated by an angry, vengeful Trump who will most certainly blame them (and virtually everyone but himself) for his party’s losses. So, it makes sense that Iran would quickly pivot to a less combative stance that appeals to their regional counterparts.

Of course, a renewed assault on Iran, in itself, would put upward pressure on oil prices – increasing the war’s economic fallout all the same. Trump, never one to let peace, harmony and economic propserity get in the way of his lust for revenge, would thus ensure a worsening of the stagflation the US has been flirting with since he was reelected.

Warsh et al can do little but sit back and hope that the economy won’t be broken by this prolonged inflationary spike. It’s hardly transitory any more.

Tomorrow’s charts will be posted after the Fed press conference and potentially after the close.

GLTA

 

Futures are modestly higher in the final week before the midterms.