Midterms and AI in focus at 2027 Forum

U.S. stocks rallied the day after the elections, sold off sharply on Thursday and steadied on Friday. See the chart. The swings illustrate a key conclusion from our 2027 Outlook Forum: the AI story is moving into a more nuanced phase. In the initial phase of the AI transformation, the investment opportunity was about pricing the conviction that the buildout needed to happen. Now the focus is shifting to assessing the size and speed of the buildout relative to how quickly AI is adopted and spreads across different tasks. A material slowdown in 2027, though far from certain, could have significant adverse market consequences. But it could also ease competition for capital and lower bond yields, while its economic fallout could temper policy initiatives. This two-sided uncertainty underpinned our move to neutral on U.S. equities and our upgrade of U.S. Treasuries last month.

The AI infrastructure boom has been a powerful driver of growth, earnings and market returns. But how long will scarcity persist, and where might abundance emerge as constraints ease? These questions ran through our Forum discussions. Participants debated how much AI capacity will ultimately be built, whether demand from adoption can justify the scale of investment and when opportunities might shift from suppliers to adopters. We heard directly from corporate CFOs about how they are deploying AI and assessing its benefits, offering a window into demand that remains difficult to measure. Another question was what would happen if capital spending slowed before productivity gains from adoption materialized. And who ultimately captures the gains and who gets disrupted – technology providers, businesses adopting AI or their customers?

Competition for capital a hot topic

Competition for capital was another major topic, as the extraordinary financing needs of AI collide with government borrowing and investment in energy security and defense. Our portfolio managers debated whether this growing demand for funding could crowd out other borrowers, even as AI investment supports economic growth and risk assets. With credit markets becoming more selective, participants also discussed whether greater equity issuance could help hyperscalers manage leverage and preserve their capacity to borrow as the buildout continues. Another key question was whether stronger growth and earnings can continue to offset higher financing costs – and where the pressure might emerge next.

The Forum came at a consequential juncture. After four years of an AI-driven bull market, markets have largely priced in the new regime of structurally higher interest rates we’ve talked about for five years. That makes the investment outlook less directional and more nuanced. Discussions ranged from shifting global capital flows and changing relationships between stocks, bonds and currencies to investment opportunities across Europe, China and emerging markets. Participants also explored how evolving market structures could affect market liquidity and volatility. The reliability of traditional portfolio hedges and the importance of retaining flexibility were also major topics.

Our bottom line

Our 2027 Outlook Forum highlighted the questions facing investors as the supply-driven regime we’ve described for five years becomes increasingly priced in. Look out for more in our 2027 Global Outlook next month.

U.S. stocks fell sharply last week following the Democratic sweep in the midterm elections, despite a rebound on Friday. For the week, the Nasdaq 100 lost 4.7%, leaving it 14% below its October peak, while the S&P 500 dropped 2.4%. U.S. Treasuries rallied, with 10-year yields falling 13 basis points over the week to 4.86%. Brent crude fell 17% to $97 a barrel amid hopes for an end to the Middle East conflict.

U.S. inflation data take center stage this week, with CPI and PPI offering the latest read on price pressures ahead of the Fed's December policy meeting. We expect persistent inflation pressures to keep market expectations for further Fed rate hikes alive. China's inflation and trade data will shed light on domestic demand and external activity, while UK and euro area GDP figures will provide a snapshot of European growth.