The AI Investment Cycle: What Has Changed?
November 2026, Equity
- Key Insights
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- AI infrastructure demand remains strong, but 2028 could represent an inflection point.
- Financing conditions and sustainable free cash flow are becoming more important differentiators.
- Relative growth and valuation matter as much as absolute growth.
- AI adoption must increasingly validate infrastructure investment.
The Midterms as a Trigger
On November 4th, the S&P 500 Index rose 1.6% as investors seemed to consider whether congressional gridlock might steady federal policy. On November 5th, selling broadened as investors appeared to weigh state-level outcomes: the S&P 500 fell 4.4%, the Nasdaq Composite Index 5.5%, and the PHLX Semiconductor Index 12.2%.
In our view, the reaction was violent because the election landed on a sector already repricing. Semiconductors were close to 40% below their 2026 peak, with forward price-to-earnings multiples (how much investors pay relative to expected earnings over the next 12 months) compressed from about 32 to 17 even as estimates rose.1 Positioning turned a repricing into a liquidation.
Semiconductors were down 18% before the vote; the election accelerated it
Total return, rebased to 100 at 30 September 2026
Exhibit: Past performance is not a guarantee or a reliable indicator of future performance. Index performance is for illustrative purposes only and is not indicative of any specific investment. Investors cannot invest directly in an index.
Daily total return of the PHLX Semiconductor Index, Nasdaq Composite and S&P 500, rebased to 100 at 30 September 2026, through 5 November 2026. Shading marks 3 to 5 November. Source: FactSet.
The market backdrop
Global equity markets are navigating a potentially important transition as investors reassess the pace of the artificial intelligence investment cycle, the implications of the U.S. elections, and opportunities beyond technology. While AI fundamentals remain constructive, market behavior increasingly reflects concerns about capital intensity, financing requirements, and the sustainability of exceptional growth rates.
We believe the election may signal a preference for a slower pace of economic and policy change, reinforcing pressures already evident in credit capacity and the competition for capital.
An environment characterized by rapid deregulation and full-speed AI investment may have become increasingly disruptive. A moderation could support a more sustainable equilibrium with somewhat slower growth, lower inflation and lower real rates, particularly if geopolitical tensions ease.
What has changed?
While demand for compute infrastructure remains robust, investor attention is shifting from the magnitude of capital spending toward sustainable growth, financing requirements, and returns on invested capital. This transition is contributing to increased volatility, particularly among companies that have benefited most from the infrastructure buildout.
We remain constructive on AI's long-term potential, but believe higher capital intensity, evolving growth rates, and greater dependence on external financing are creating a more selective investment environment. Increasingly, the opportunity lies in identifying where growth potential can translate into durable earnings and attractive returns.
What is shaping our market outlook?
1. AI infrastructure remains strong, but 2028 could represent an inflection point.
We continue to see substantial AI investment requirements, with 2027 hyperscaler capital expenditures potentially exceeding market expectations. Demand for CPUs, servers, and supporting infrastructure remains strong, while power availability and permitting continue to constrain deployment.
Importantly, much of the infrastructure planned for 2026 and 2027 is already permitted or under construction, supporting near-term spending visibility. However, election-related political resistance and slower permitting today could begin affecting infrastructure deployment in the second half of 2028.
At the same time, additional capacity is expected to become available in 2028. As supply constraints ease, ordering intensity could normalize, potentially triggering an inventory correction even if underlying AI adoption continues expanding.
We believe distinguishing temporary scarcity-driven demand from the ability to generate sustainable growth will become increasingly important as the cycle evolves.
2. Financing conditions are becoming increasingly important.
The first phase of AI infrastructure investment was largely supported by the internally generated cash flows of major technology companies. As capital requirements expand, the ecosystem is becoming more dependent on debt and equity financing.
This introduces a new risk. Falling equity valuations and higher financing costs can undermine project economics, potentially delaying investment even when demand remains healthy. Financial markets and infrastructure spending are becoming increasingly interconnected.
We believe balance-sheet strength, financing flexibility, and sustainable free cash flow will be critical differentiators. Companies capable of funding growth internally may be better positioned as capital becomes more expensive.
3. Relative growth rates matter as much as absolute growth.
Semiconductor fundamentals remain strong, supported by sustained AI infrastructure demand. While growth rates could eventually normalize from exceptionally elevated levels, the timing and magnitude remain uncertain.
At the same time, hyperscaler growth could accelerate, while leading AI laboratories may represent an increasingly important source of demand and economic value. This creates a more nuanced investment environment where strong absolute growth does not necessarily translate into superior relative equity returns.
We remain focused on identifying changes in relative growth, valuation, and market expectations. We have found the strongest businesses do not always generate the strongest returns when exceptional growth is already reflected in valuations.
4. AI adoption must increasingly validate infrastructure investment.
Coding agents have emerged as one of the clearest demonstrations of AI's commercial utility. The next phase will depend on whether adoption expands into enterprise workflows, personal agents, and other applications generating sustained economic value.
We believe the transition from model development toward practical applications is critical. Infrastructure investment ultimately needs to be supported by monetization, productivity improvements, and expanding usage.
The revenue trajectories of leading AI laboratories will provide important evidence of whether demand is broadening sufficiently to support the industry's capital commitments. We see opportunities extending beyond infrastructure suppliers toward businesses capturing value from AI deployment.
Jennifer O'Hara Martin
Global Equity Portfolio Specialist
- Oct 2026
- Equity
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1Based on the PHLX Semiconductor Sector Index as of November 5, 2026. The index hit a peak on October 6, 2026.
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