After the Midterms: A New Policy Landscape for Markets and Investors

The 2026 midterm elections meaningfully shifted the political landscape. Democrats gained control of both chambers of Congress and made significant gains in gubernatorial, state legislative, and local races. For investors, the significance lies less in which party won than in how the result redistributes policy power across federal, state, and local governments.

For investors, divided government can support financial markets by limiting significant policy shifts and providing a more stable policy backdrop. That political division reduces the likelihood of policy extremes and will likely make major federal legislation more difficult, while giving Congress more influence over spending, oversight, and confirmations. The White House retains considerable authority over trade, foreign policy, immigration, and executive action. State and local officials will also shape datacenter development through decisions involving permitting, utility regulation, power and water infrastructure, and economic incentives.

Markets initially responded favorably on Wednesday, before turning sharply lower Thursday as investors considered a possible slowdown in AI infrastructure spending. The election itself did not create these concerns but rather intensified an existing debate over whether the extraordinary pace of AI spending is sustainable, and if companies can earn sufficient returns on the capital being deployed.

While AI was the most visible source of volatility, the potential economic consequences are broader. Changes in fiscal policy, trade, energy, regulation, and foreign policy could alter the outlook for growth and inflation, creating a different economic backdrop than investors faced before the election.

What Are the Investment Implications?

Policy change creates uneven impacts

The election’s effects are unlikely to be uniform. AI infrastructure companies face renewed questions about the pace of datacenter construction, access to power, project economics, and local approvals. Health care, energy, financial services, defense, industrials, and other regulated industries will likewise face changing conditions from government funding, oversight, trade, and regulation. The election may have greater implications for relative sector and industry performance than for the direction of the overall market.

AI adoption and spending are different stories

Companies supplying the physical infrastructure for AI were among the most affected by the post-election selloff. The implications may be different for the large technology companies funding the buildout than for companies using AI to improve products, productivity, and profitability. If capital spending moderates while demand for AI services remains strong, some technology companies could generate stronger free cash flow and apply greater discipline to new investments.

The backdrop for growth, inflation, and interest rates could shift

The effects of AI capital spending extend well beyond the technology sector. The key question is not whether that investment stops, but whether its extraordinary rate of growth moderates. Even a slower pace of expansion could weigh on economic growth at the margin, particularly in regions and industries tied closely to the buildout.

Other policy developments could pull growth and inflation in different directions. The net effect remains uncertain, but a different combination of growth and inflation could influence the path of interest rates and Federal Reserve policy.

Credit markets will provide an important signal. Stable financing conditions would suggest that the adjustment remains primarily a repricing of equity expectations, while meaningful deterioration could point to broader economic or financial stress.

Diversification matters when the environment changes

Strong performance from technology companies has increased market concentration in recent years. The post-election reaction is a reminder that portfolios should not depend on one theme, sector, or group of companies. Diversification may appear less valuable when a narrow group leads the market, but its importance becomes clearer when leadership changes. It is also a reminder that transformative technologies do not guarantee attractive returns at every valuation.

What Should Investors Do?

Sharp market moves can create pressure for investors to act, but portfolio decisions should begin with a financial plan rather than the latest political or market headline. Investors should:

• Stay diversified. Broad exposure across asset classes, sectors, market capitalizations, regions, and investment styles can reduce dependence on a narrow group of market leaders. Volatility may also provide opportunities to rebalance portfolios toward strategic targets.
• Evaluate quality. Broad declines may create opportunities to strengthen portfolios with higher-quality investments at more attractive valuations.
• Keep a long-term perspective. Elections can affect policy expectations and short-term prices, but long-term returns remain driven by economic growth, corporate earnings, valuations, interest rates, and investor behavior.

Investors should avoid repositioning portfolios around a single event or short-term market reaction. If long-term goals, liquidity needs, and risk tolerance have not changed, the financial plan should remain the foundation for investment decisions.

The economic and market consequences of the election will unfold gradually and unevenly. AI infrastructure has been the immediate focus, but changes in fiscal policy, trade, energy, and regulation may ultimately prove just as consequential. CAPTRUST will continue to monitor whether weakness spreads beyond AI infrastructure, whether large technology platforms continue to outperform infrastructure suppliers, and whether credit conditions signal broader economic or financial stress.

This material is intended for informational purposes only and should not be construed as individualized investment advice. Investment decisions should be made in consultation with a qualified advisor and based on an investor’s objectives, risk tolerance, and circumstances.