Slower AI Infrastructure Buildout Ahead?

MACRO FRAME

Investors are rotating out of tech as a Q3 earnings reflect sharp drops in free cash flow. Recent price action suggests a repricing of the AI trade rather than a deterioration in macroeconomic sentiment.

STOCK INDEX FUTURES

Equity index futures were mixed overnight as the post-midterm rally broadens outside the AI infrastructure trade; the Dow and S&P are both higher while the Nasdaq is lower. Reduced political uncertainty, prospects for legislative gridlock and Wednesday’s sharp decline in oil prices supported the broader market. However, divided government may constrain further deregulation rather than deliver sweeping new restrictions, with presidential veto power remaining an obstacle to major legislation. AI-related stocks continued to diverge. Chipmakers, data-center developers and equipment suppliers faced concerns that greater state and local opposition could delay construction. UBS estimated that roughly 30% of expected 2028 data-center additions could be affected by pauses, although this represents potential delays rather than confirmed cancellations.

Qualcomm fell nearly 10% in premarket trading after smartphone-chip sales missed expectations, while Nvidia, Marvell and Intel also declined. Data-center operators, neocloud providers and AI-exposed power companies remained under pressure. By contrast, Amazon, Meta and Alphabet gained more than 1%, as investors considered whether a slower infrastructure buildout could encourage greater capital discipline and reduce concerns about excessive AI spending. The broader benefit from gridlock remains conditional. Limits on additional fiscal expansion could support market confidence, but prolonged budget disputes or continued executive action on trade and Iran could preserve policy uncertainty. History reflects favorable average equity returns following midterms under Republican presidents facing divided government, though those outcomes are not a forecast for the current cycle.

CURRENCIES

US DOLLAR: The USD index is little changed at 101.618. A rebound in oil prices and uncertainty over the next phase of the Iran conflict tempered the post-election dollar selloff. While investors have viewed potential constraints on fiscal expansion and AI investment as possible headwinds to US growth, expectations for further Fed tightening remained intact. Markets priced an 81% probability of a December increase, up from 77% on Wednesday. Wednesday’s ISM services report offered a mixed backdrop. The headline index slipped to 54.5 from 54.9, below expectations of 54.8, as business activity and new orders slowed. Employment improved, however, and the prices index remained elevated at 73 despite a modest decline. Respondents’ warnings about incomplete pass-through of tariff and fuel costs suggest that softer activity has not eliminated inflation risks.

EURO: The euro is little changed at $1.1219. Recovering energy prices and uncertainty over Iran have interrupted the euro’s three-day advance, while expectations for additional ECB tightening moderated. Markets assigned roughly a 63% probability to a December hike, even after euro-area inflation accelerated to 4% in October. French fiscal concerns remained a potential constraint, although the immediate bond-market response was more constructive. A strong French debt auction and improved risk appetite helped narrow the French–German 10-year yield spread to approximately 146 basis points. The ECB’s hawkish hold and forward guidance has all but guaranteed a rate hike at the bank’s meeting in December. The euro’s upside, however, is likely to be contained by the prospect that December’s rate hike will be followed by a pause.

BRITISH POUND: Sterling fell 0.10% to $1.3458 after the Bank of England raised its policy rate by 25 bps to 4%. The decision passed 8–1, with Catherine Mann favoring a larger, half-point increase. The limited currency response reflected how fully the hike had been anticipated and uncertainty over whether subsequent tightening will match market expectations. Governor Andrew Bailey cautioned that the increase was not necessarily the start of a lengthy hiking cycle, but indicated that another move would likely be needed unless the Middle East conflict is resolved. The BoE projected inflation averaging 4.8% in the second quarter of 2027 and returning to target only in the third quarter of 2028. With markets already anticipating three quarter-point increases next year, sterling remains sensitive to any guidance that tempers those expectations. While the UK economy has shown resilience over recent months, the bank will likely remain cautious against future rate hikes to avoid slowing its fragile growth backdrop.

JAPANESE YEN: The yen is little changed at 158.44 yen per dollar. Minutes from the Bank of Japan’s September meeting reinforced expectations for further tightening. Some policymakers raised the possibility of faster increases following September’s hike to 1.25%, and markets widely anticipated another move in December. Discussion of the neutral and terminal policy rates also highlighted the BOJ’s growing focus on how much further borrowing costs can rise without unduly weakening activity. Money markets are fully-priced for a rate hike in March and see 64 bps of tightening over the next 12 months. With the bank now cautious about overshooting its inflation target, it could potentially speed up the rate of hike from roughly every six months to every three months, leaving the door open for a hike at the December meeting.

AUSTRALIAN DOLLAR: The Aussie is little changed at $0.7003. The National Australia Bank reported a sharp drop in its annual profits, while a historical department store in Australia, David Jones, entered administration on Thursday in what the market is eyeing as signs that Australia’s economy is slowing. Slower economic growth likely results in a weaker labor market backdrop, which would reinforce expectations that the Reserve Bank of Australia is done with its rate hiking cycle. The bank hiked rates 25 bps in a split 6-3 decision and removed language explicitly stating its willingness to raise rates further if necessary in its policy statement earlier this week. Money markets are currently pricing -22.5 bps of easing by year-end 2027.

TREASURY FUTURES

Yields  rose across the curve in a flattening move alongside an overnight rise in oil prices following Wednesday’s rally. Treasuries attracted demand Wednesday as sharply lower oil prices reduced near-term inflation concerns and the election outcome encouraged expectations of more constrained fiscal expansion. Investors also considered whether slower data-center development could moderate investment growth. The fiscal implications remain two-sided. Gridlock could limit additional spending and borrowing, but it does not guarantee deficit reduction; prolonged budget confrontations could instead increase uncertainty. Historical analysis shows that 10-year Treasury yields have, on average, declined between midterm election day and year-end under Republican presidents facing divided government, but the current inflation and fiscal backdrop will determine whether that pattern repeats. The services data reinforced the tension between moderating growth and persistent inflation. October’s ISM services PMI fell to 54.5 as activity and new orders slowed, but employment expanded and supplier deliveries lengthened. Although the prices index eased to 73 from 74, respondents continued to report supply-chain strains and warned that some tariff and energy costs had yet to reach customers.

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