The US mid-term elections have been front of mind for many UK investors over recent weeks. Charlie Lloyd, Head of Investments, and Wayne Nutland, Senior Investment Manager share an update on events, their market impact and how the investment team has been positioning the VT Shackleton funds.
Key take-aways:
- US mid-term elections resulted in a stronger-than-expected Democratic victory, creating a divided US government. This was initially viewed positively by markets as it is likely to lead to greater checks and balances on policymaking.
- Markets have however been volatile since the election, with an early rally followed by sharp weakness in technology stocks as investors reassessed the outlook for AI investment and data centre expansion.
- Growing political and regulatory scrutiny of AI and data centre construction has become a key driver of market sentiment, particularly for technology and AI-related companies.
- Despite weakness in major technology stocks, broader stock markets, value-oriented investments, infrastructure and several non-technology sectors have shown greater resilience.
- Bonds have performed well during recent market turbulence, reinforcing their role as an important source of diversification within multi-asset portfolios.
- The VT Shackleton investment team remains focused on long-term fundamentals rather than short-term market movements, maintaining a diversified approach and making no immediate portfolio changes following the election results.
- We believe clients can take comfort that diversification across asset classes and within equity allocations has mitigated the effects of the drawdowns seen in broader stock markets.
US mid-term elections
The US mid-term elections took place on Tuesday 3rd November, with the Democrats doing far better than had been expected, winning control of both the House of Representatives and the Senate. Like the 2024 Presidential election, it seems that the cost of everyday essentials has been a decisive factor in the election, rather than a specific endorsement of a Democratic platform. Voters associated higher prices with the Trump administration, specifically the war in Iran, and wanted to punish the administration for this, and also to express wider discontent with the President and his style of governing.
Source LSEG Datastream, as at 4th November 2026
Market reaction – Democrat ‘blue wave’ leads to higher market volatility
The very early stock market reaction to the US mid-term election results was negative as the extent of the Democratic win became clear. However, stock markets quickly turned around to deliver solidly positive returns the day after the vote. The US dollar fell, as did bond yields.
This reaction reversed on 5th November, with US stocks experiencing sharp weakness in the US morning/European afternoon. Technology stocks were at the forefront of the selling by investors (triggering falls in share prices) with the tech company-dominated Nasdaq 100 index falling over 6% on 5th November.
Source: LSEG Datastream, as at 6th November 2026
We believe it is unwise to try precisely to interpret market events of this nature over such a short space of time, but in the following paragraphs we aim to outline our view on the market shift.
Initial market positivity:
With Congress in Democratic hands and the Presidency Republican, the US government is split, which has historically been a constructive backdrop for stock markets, reflecting the difficulty for either side in passing particularly controversial measures. For bonds, in something of an echo of the UK’s recent Budget, difficult decisions on the US fiscal deficit are deferred, but a divided government means that things are unlikely to get materially worse, whilst increased checks and constraints on the Trump administration are likely to ease fears over the independence of the central bank, the US Federal Reserve.
It seems highly probable that the market took positively to the prospect of a more constrained President Trump, both in terms of Congress but also reflecting the likelihood that his authority in the Republican party has weakened. Markets are beginning to look past the Trump era and hoping for a more conventional form of policymaking after the 2028 election.
Although investors have reacted positively to several aspects of Trump’s programme, most notably tax cuts, his unpredictable and erratic policymaking itself became a source of volatility, in particular the tariff episode in 2024 and the Iran war more recently.
Finally, with inflation being a key issue behind the defeat of the incumbent party in this election and for the Democrats in 2024, the prospect of inflation and higher prices is likely to act as a constraint on both parties going forward. This, in turn, is likely to lead to more economically orthodox policymaking.
Subsequent weakness – ‘remember, remember the 5th of November’
The sudden shift in market sentiment that took place in the US morning on 5th November seems very likely to be related to the fact that, politically, opposition to US data centre construction and the artificial intelligence roll-out was a clear winner at the elections. In addition to general opposition from US Democratic politicians, and many Republicans, it appears that there was enthusiasm at state level to impose restrictions on data centre construction.
The fact that technology stocks, particularly those associated with AI and other companies linked with the buildout of data centres led the market weakness is a powerful indication that this is the case. The very high levels of investment in AI that are being made have not only been positive for the companies selling the goods and undertaking the construction, but have also been a key support for wider US economic growth. At this stage, it is unclear whether data centre projects will see temporary pauses with some mitigating measures put in place to appease local communities (e.g. around water use and local power prices), or whether there will be wide-spread permanent cancellations. It seems that the market probably shifted from the former to the latter view extremely quickly on Thursday 5th November.
Other risks flowing from the election results include the possibility that a politically defeated Trump will have a strong reaction, although thus far he has accepted the result with reasonably good grace. Also, the potential for a Democratic clean-sweep in 2028 has increased. Whilst the mid-term election has been interpreted by many as an ‘anti-Trump’ vote rather than a pro-Democrat vote, the chance of more left-wing elements in the Democratic party gaining ascendency has increased. A relatively negative stock market reaction would be expected were this in turn to result in a left-wing Democratic candidate for the Presidency in 2028. However, to reiterate, these risks are further into the future, and the market’s shifting views on AI and the data centre build-out appear to have been the key factor behind the shift in market sentiment on 5th November.
Rotations in the stock market
The stock price weakness seen in many companies exposed to technology and artificial intelligence began in October. This reflected growing market concerns that the large sums being invested by businesses and governments in artificial intelligence will lead to a sufficient return, and most probably, some pricing in of growing political opposition to AI and data centres.
From the end of September to 5th November, the S&P 500 has returned -5.2%, with those parts of the market focused on technology and AI falling further. The technology-focused Nasdaq 100 index returned -13.7%, the Taiwanese stock market -17.4%, and Korean market -23.6%. (All returns in GBP.)
However, despite these well publicised falls amongst the previous ‘AI winners’, many stocks and sectors away from technology have held up far better than the tech names in October and November to date.
Over the same period, a measure of US equities where every company has an equal weighting returned 2.8%, whilst UK’s FTSE 100 has returned 1.8%. Similarly, areas of the equity market such as infrastructure also achieved positive returns.
Source LSEG Datastream, as at 4th November 2026. Equity price indices in GBP, rebased to 100.
Bonds – recent performance and their role in multi-asset funds
As we wrote in September, rises in bond yields present a challenge for governments and other borrowers, but an opportunity for investors, as higher yields are a strong indicator of higher future returns, at least before taking into account the effects of inflation. We also commented that, for UK government bonds in particular, duration, a measure of bond risk, had decreased significantly in recent years. Essentially, bonds offer better prospective returns, for less risk, than was the case in the last decade and the early part of this one.
As such, our view remains that bonds, in particular government bonds, have an important role to play in diversifying multi-asset portfolios. Government bonds are one of the few assets that can deliver good returns during recessions or periods of stock market weakness, although of course much depends on the reasons behind any weakness. We do however diversify our bond exposure, holding allocations to corporate, high-yield and emerging market bonds, as well as more specialist types of investments with bond-like characteristics, such as asset-backed securities.
We increased bond exposure within the VT Shackleton funds in September, and it has been pleasing to see bonds deliver good returns during the stock market weakness that has emerged in October and November.
The period since the end of September is a good example of the benefits of multi-asset diversification. Since the end of September, UK and US Government bonds have both returned around 2.5%, global investment-grade corporate bonds 2.1%, and even global high-yield bonds (which are essentially loans to riskier/lower quality companies) have delivered a modest positive return of 0.5%. (All returns in GBP, or for overseas bonds hedged to GBP.)
View on equity markets
Forming clear views on equity markets during such rapid changes in market sentiment is difficult, but we try to look through the day-to-day noise and focus on tangible fundamentals, accepting that future events are always unclear.
The risks of greater regulation on AI and restrictions on the data centre build-out have increased. As referenced above, this has been a key source of demand for companies active in this field, and has also been important to the wider economy. However, we should bear in mind that AI is critical for global competitiveness and, to some extent, a national security issue, where the US competes with China. It seems unlikely that the US government will completely stop further AI development or data centre build-outs.
More likely is that restrictions and regulations will be put in place, perhaps to shift the locations of data centres and to mitigate the impact on local communities, although what will eventually transpire remains to be seen.
It’s also important to differentiate between different types of technology companies. The smaller, more ‘niche’ companies associated with AI and the data centre build-out are in a different position to several of the very largest US technology companies which, in many cases, have more diversified business models.
We should also consider that the market had been increasingly wary of the risk that the AI and data centre build-out would lead to excess capacity, resulting in lower overall returns – a fundamental feature of supply-and-demand economics. This risk may well be mitigated by restrictions on data centres; the strong rally seen in the share prices of the biggest US tech companies the day after the election was likely an indication that the market initially welcomed politically enforced restraint on their capital expenditures.
A sharp fall in oil prices in recent days, if sustained, should help bond yields to decline; if these assumptions prove correct, the lower borrowing costs associated with a decline in bond yields would, in turn, be likely to support stock market valuations. However, here we also need to acknowledge the risk that a politically wounded President Trump could seek to re-escalate the war in Iran.
Finally, the positive factors historically associated with a divided US government and the prospect of greater constraints on the often-erratic policy making of the Trump administration remain as true today as they were on 4th November, before the most recent declines. Crucially, enhanced checks and balances should bolster confidence in the independence of institutions like the US Federal Reserve.
View on equity markets – valuations
US stock valuations have declined notably this year, particularly for technology companies, with strong earnings growth keeping overall returns positive. With declines in stock market valuations this year, most markets are valued at or around their 10-year averages, with notable exceptions for emerging market stocks and US technology stocks, which trade on valuations lower than these averages, reflecting welcome caution over the durability of company earnings growth and profit margins. The market overall is not excessively valued, although there are valid questions over future earnings growth.
Whilst US corporate profit growth is highly likely to moderate in 2027 from the very high growth rates seen in 2026, current consensus forecasts are for decent levels of profit growth, which should provide a positive backdrop for US equities, if this growth does indeed materialise – as ever, it is important to note that the accuracy of forecasts can never be guaranteed. In the longer term, the sustainability of current high profit margins is a risk; that being said, US corporate profit margins have been able to remain higher than their historical averages for many years now.
Source LSEG Datastream, as at 5th November 2026. The price/earnings ratio, defined as the current price divided by expected earnings for the next 12 months, can be thought of as the number of years of earnings which are being paid for a stock. ‘Magnificent 7’ refers to Nvidia, Apple, Microsoft, Alphabet, Amazon, Meta, Tesla.
VT Shackleton funds
We believe it would be unwise to over-interpret short-term market movements, especially when the market makes rapid, contradictory moves in such a short space of time. Certainly, the election results are consequential, but it will take time for the full implications of the political changes to become clear, not least as in most cases actual personnel changes in the US Congress do not take place until January. The market will continue to watch carefully to assess the extent of greater restrictions on AI and the data centre build-out.
The Shackleton investment team is not planning any immediate changes in the VT Shackleton funds as a result of the US elections. Often, knee-jerk reactions can be regretted, and we are pleased that the multi-asset diversification in the funds has worked well to mitigate the losses seen in some areas of the equity market and that several of the equity exposures we hold in the funds have performed well recently, such as the US equity equal-weighted strategy referred to above, alongside ‘value’ strategies (a style of investing that involves buying shares in companies that are trading at prices that are lower than their intrinsic worth) in the US, Europe and UK. Whilst the US technology stocks are relatively meaningful exposures in the VT Shackleton funds, and justifiably so given their strong earnings growth and profit margins, exposures are lower than would be obtained by investing in a global equity tracker fund, reflecting our long-held caution around the risks to the sustainability of these companies’ earnings and concentration amongst a small number of businesses.
Recent market gyrations have been a clear example of the importance of diversification. We continue to prioritise diversification and cost effectiveness, and believe that these characteristics leave the funds well placed for the future.
Important information
This document is issued by Shackleton, which is a trading style of Shackleton Advisers Limited. Shackleton makes no warranties or representations regarding the accuracy or completeness of the information contained herein. We have prepared the following document based on our view of the current market. Nothing in this document shall be deemed to constitute financial or investment advice in any way. We recommend you speak to your adviser before making any decisions. This document shall not constitute an invitation or inducement to any person to engage in investment activity. Past performance is not a guide to future returns and the value of capital invested and any income generated from may fluctuate in value. Shackleton is a trading style of Shackleton Advisers Limited, which is authorised and regulated by the Financial Conduct Authority. FCA Number 163291. Shackleton Advisers Limited is a limited company registered in England and Wales, with number 04129116. The company’s registered address is 40 Gracechurch Street, London EC3V 0BT. Correspondence address: 23 Coleridge Street, Hove BN3 5AB.
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