The midterm elections are behind us, but the financial markets are still trying to determine what comes next.
Last week, the S&P 500 declined 2.67%, the NASDAQ lost 3.37%, and technology stocks fell nearly 7%. The VIX, Wall Street's closely watched measure of expected volatility, climbed toward 30.
The political shift in Washington certainly contributed to the uncertainty.
But I believe the bigger issue may have been developing long before Election Day.
The extraordinary investment boom surrounding artificial intelligence is beginning to face a serious financial test.
And its consequences could extend well beyond the stock market.
AI's Next Challenge: Turning Investment Into Profits
Artificial intelligence remains one of the most transformative technologies of our lifetime.
But there is an important difference between a technological revolution and a profitable investment.
Companies have committed enormous resources to data centers, computing infrastructure, and AI development. Investors are now questioning whether the resulting revenues and free cash flow will justify those expenditures.
Recent weakness in semiconductor, data center, and AI infrastructure companies suggests those concerns are becoming more widespread.
The question isn't whether AI will change the world.
It's whether every company investing billions today will earn an acceptable return tomorrow.
If AI-related capital spending slows meaningfully, the consequences could extend to construction, energy infrastructure, equipment suppliers, financing, and ultimately economic growth.
That's a risk worth paying attention to.
Credit Markets Are Sending a Warning
Perhaps even more important than falling technology stocks is what's happening in corporate credit.
High-yield credit spreads have begun widening, suggesting lenders are becoming more cautious about financial risk.
This doesn't mean a credit crisis is imminent.
But historically, deteriorating credit conditions have sometimes preceded broader economic weakness.
And when companies depend on continued access to financing to support enormous capital spending programs, the cost and availability of that financing matter.
The Economy Remains Strong — Perhaps Too Strong for the Fed
Despite the volatility, the economic numbers remain surprisingly resilient.
October's employment report showed 165,000 new jobs, while unemployment remained at 4.1%.
Corporate earnings also continue to impress, with approximately 85% of reporting S&P 500 companies beating earnings expectations.
But inflation remains a problem.
The latest Personal Consumption Expenditures inflation reading came in at 3.6% year-over-year, still substantially above the Federal Reserve's 2% target.
That leaves the Fed in a difficult position.
If economic growth remains strong, interest rates may need to stay elevated or rise further.
If the AI spending boom begins to unwind, the Fed could instead face a meaningful slowdown.
Neither outcome makes the investment environment particularly easy to navigate.
What Did the Midterms Really Change?
The Democratic sweep has created a new political landscape, with a Republican president facing an opposition-controlled Congress.
Markets are now evaluating potential changes involving taxation, regulation, and government spending.
For successful business owners, those issues deserve attention, particularly when considering business sales, capital gains, succession planning, and estate transfers.
But potential legislative changes are not enacted law.
History has repeatedly demonstrated that markets can perform well under divided government. Political developments matter, but corporate profits, inflation, interest rates, and economic growth ultimately play a far greater role in long-term investment performance.
My Perspective
I remain constructive about the longer-term economic outlook, but increasingly cautious about the risks developing in financial markets.
AI remains a compelling growth opportunity. Corporate profits remain strong. And the broader economy continues to demonstrate resilience.
However, the investment landscape is changing.
The AI boom is entering a more demanding phase. Credit markets are becoming more cautious. Inflation remains stubborn, and investor expectations are being tested.
What's encouraging is that much of the recent market activity reflects money rotating between sectors rather than investors abandoning equities altogether.
The question is whether that rotation remains orderly or becomes something more serious.
Bottom Line
We are entering a period when investors may need to distinguish more carefully between extraordinary technological potential and sustainable financial performance.
The election may have triggered the latest volatility.
But AI investment, credit conditions, inflation, and interest rates will likely determine what happens next.
This is not a time for panic. It is a time to make certain your financial strategy is built to withstand uncertainty.
Planning Perspective — Protecting What You've Built
For successful business owners, periods of political and market uncertainty reinforce the importance of coordinated financial planning.
Investment decisions, income tax strategies, estate planning, asset protection, and business succession should never be viewed independently.
At Integrated Wealth Management, we help business owners bring these critical decisions together, working alongside their attorneys, CPAs, and other professional advisors.
If you're contemplating a business sale, preparing for succession, or concerned about how changing economic and tax policies may affect your family's wealth, I invite you to schedule a confidential conversation.
After all, protecting the wealth you've built requires just as much thought as creating it.
About Gary Hager
Gary K. Hager, CFP®, CBEC, CTFA is the founder of Integrated Wealth Management. He advises business owners and families on business exit planning, succession strategies, estate planning, asset protection, and long-term wealth management.