Post-Election Volatility

The midterm election certainly increased market volatility - at least for a few days.  The first day post-election produced the largest one-day rally ever after a midterm election while the second day more than erased all those gains. Most of the negative action initially hit the large tech firms whose fortunes are increasingly tied to artificial intelligence, and which have lately been making up a big part of the S&P 500’s total capitalization.  But then startled traders started selling everything.

It seems as if both Republican and Democratic voters agreed on at least one issue: they don’t want the large tech companies building giant data centers all over the country.  So (the reasoning goes) if the large tech firms are going to be prevented by voters and politicians who listen to them from borrowing billions to build ever-larger data centers, those firms must be less valuable and their future is limited. Consequently, shares of chipmakers and the hyperscalers all saw their aggregate share prices drop dramatically.

The irony is that this hostile political climate might not be such a terrible outcome for the large tech firms in question.  A pause in spending billions and even trillions of dollars on construction and large piles of sophisticated chips might allow the revenues of those firms to catch up a bit with their spending.

So, what can we expect going forward?  Who knows?  As always, the short-term market action is basically unknowable.  But longer term the best prediction might come from a century of market behavior, which tells us that all the workers who go to the office or plant day in, day out will make their companies steadily, incrementally more valuable, regardless of what nervous traders might think in the moment. Indeed, with nearly 90% of the S&P 500 companies reporting third quarter earnings results, the year-over-year gain in earnings is 27%.  Consensus estimates for 2027 and 2028 continue to be raised.

There are times when doing nothing is actually harder than reacting to the general panic, but the markets have taught us that doing nothing has usually been the better long-term approach.   That might even be true for the builders of billion-dollar data centers in the current political environment.

-The LVM Team