U.S. equities finished lower last week amid exceptionally volatile trading, as the midterm elections set off a sharp round trip in investor sentiment. The S&P 500 declined 2.68%, the Dow Jones Industrial Average fell 0.94%, and the Nasdaq Composite lost 3.37%, while the small-cap Russell 2000 slipped 2.05%. A post-election rally on Wednesday was more than erased on Thursday, when the S&P 500 fell 4.36%, its worst day since April 2025. The losses were concentrated, however. The equal-weighted S&P 500 outperformed the capitalization-weighted index by more than 1.6 percentage points, and eight of eleven sectors finished ahead of the index.

Democrats won majorities in both the House and Senate, setting up divided government for the final two years of President Trump’s term. Markets initially treated the result as a clearing event, since divided government has historically limited sweeping legislation, including new fiscal stimulus. Treasuries rallied, and the 10-year yield finished the week at 4.86%. Energy was the weakest sector, falling 11.9%, as U.S. crude oil dropped 12.8% amid reports of progress in Qatari-mediated talks between Washington and Tehran.

That optimism faded as investors focused on what the results could mean for the artificial intelligence buildout. Several winning candidates campaigned on stricter oversight of data centers, notably Texas Governor-elect Gina Hinojosa, who called for pausing new projects until protections for residents are in place. Semiconductor stocks fell 12.2% for the week and memory chip makers dropped 18.2%. The largest cloud providers held up better, with Amazon gaining 7.9% last week, as existing data center capacity may become more valuable if new projects face delays. Sentiment steadied Friday after Hinojosa clarified she is not opposed to data centers outright and President Trump reiterated his support for the buildout.

Over the weekend, NVIDIA found itself in the spotlight for reasons unrelated to earnings. NVIDIA’s board has opened an independent investigation into reports regarding a relationship between CEO Jensen Huang and an executive at Megaspeed, a Singapore-based customer that has faced scrutiny over whether advanced NVIDIA chips were diverted to China. NVIDIA has said it currently has no reason to believe company secrets or national security were compromised. More broadly, the controversy adds another layer of policy uncertainty for the semiconductor industry at a time when Washington is already considering tighter restrictions on advanced chips and AI infrastructure. Attention will turn back toward the fundamentals next week when NVIDIA reports earnings, with investors focused not only on demand for its latest chips, but also on what its outlook says about the durability and pace of the broader AI infrastructure buildout.

Economic data continued to point to a resilient backdrop. October payrolls rose by 165,000, unemployment declined to 4.1%, and both manufacturing and consumer sentiment exceeded expectations. Corporate fundamentals have also remained strong. With about 88% of S&P 500 companies having reported, third-quarter earnings growth is tracking above 31% year-over-year. Yet investor reactions suggest the bar has risen considerably. Companies beating estimates have received relatively little reward, while those lowering guidance have been punished sharply, reinforcing that strong fundamentals alone may not be enough to sustain stretched valuations.

The week ahead brings fresh tests for both inflation and the AI trade. Tuesday’s October Consumer Price Index is expected to show headline inflation near 3.7% year-over-year and core inflation edging up to 2.7%, with producer prices following on Friday. Earnings from CoreWeave, Applied Materials, and Cisco will offer more insight into AI infrastructure demand, and investors will watch whether Anthropic proceeds with its planned IPO roadshow. In Washington, Congress faces a December 11 government funding deadline.

2026 The Long View | First Merchants Bank

 

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