Top of the Morning: CEO Macro Briefing Book - Election digestion

Paul Hsiao · UBS Chief Investment Office, Global Wealth Management

Voters rejected data center ballot measures in about ten US jurisdictions, a warning for the buildout.

Paul notes that data centers appeared on ballots in at least ten US jurisdictions and voters rejected them each time. He presents this as a key thing to watch when reading the market reaction, because it signals public resistance to the data center buildout and possible scrutiny of AI developments under Democratic oversight.

“Data centers came on the ballot at least 10 times or at least across 10 jurisdictions in The US and they were similarly rejected 10 times by the voters.”at 1:25

Paul Hsiao · UBS Chief Investment Office, Global Wealth Management

Existing cloud providers rallied as current compute gains value while new data centers come online slowly.

Paul says some existing cloud service providers have rallied. His reasoning is that existing compute power and cloud capacity might become more valuable as new data centers become slower to come online. This makes incumbent capacity relatively scarcer, so it is worth more.

“some of the existing cloud service providers have actually rallied because existing compute power and existing cloud capacity might become more valuable as data centers become slower to come online.”at 8:32

Paul Hsiao · UBS Chief Investment Office, Global Wealth Management

Post-midterm risk clearing should lift equities as it historically has; small caps rallied strongly.

Paul says large and small caps rallied after the election because markets treat the midterms as a risk-clearing event. History shows flat S&P 500 performance leading up to a midterm and then equities taking off once the cycle clears. Small caps rallying as strongly as large caps is notable.

“I think that's largely based on markets viewing at the election in general as a risk clearing event, and it really follows in history where you kind of have flat performance in S and P 500 leading up to a midterm.”at 1:25

Paul Hsiao · UBS Chief Investment Office, Global Wealth Management

Oil may stay lower if Democratic oversight eases Iran tensions, after an 8%+ one-day drop.

Paul argues that with more Democratic oversight in the House and Senate, there might be less geopolitical tension around the Iran war. That would mean lower oil prices, and oil fell more than 8% in a single day. The drop also hit S&P 500 energy producers, which he flags as a market nuance.

“the idea is that with more democratic oversight in the House and Senate, there might be a reduction in geopolitical tension. So that means lower oil prices, and we saw oil prices drop more than 8% in one day.”at 1:25

Paul Hsiao · UBS Chief Investment Office, Global Wealth Management

Midterm result rejects White House priorities and signals a generational shift in political power.

Paul argues the midterms were not an ordinary party switch but seem like a generational change of power across much of the country. He says it is impossible to view the result as anything but a rejection of many of the White House's priorities. He adds that AI came up on many ballots, which matters for how markets read the result.

“What happened in the midterms was just not your garden variety flavor of the party switching during the midterms, but it seems a lot more like a generational change of power when it came to many parts of this country.”at 1:25

Paul Hsiao · UBS Chief Investment Office, Global Wealth Management

Historically wide debt is hard to fix: entitlement cuts face guardrails and tax hikes restrict growth.

Deficits are still quite wide even with low unemployment, and debt levels are historically high. Cutting spending is difficult because much of it is Social Security and Medicare, which are political guardrails. Raising revenue would be growth-restrictive and unpopular, so future lawmakers will have to contend with this problem.

“deficits are still quite wide... dealing with the historically wide debt levels is something that Congress as well as the executives will have to deal with”at 5:26

Paul Hsiao · UBS Chief Investment Office, Global Wealth Management

Paul expects the Fed to hike at least two more times through the first half of 2027.

Lower oil prices reduce the pressure on the Fed to hike imminently, and markets still price a hike in December. Paul thinks the Fed will hike at least two more times through the first half of 2027. This path keeps financing costs and longer-term yields elevated.

“especially if the Fed is gonna hike at least two more times, in the through the first half of twenty twenty seven.”at 5:26

Paul Hsiao · UBS Chief Investment Office, Global Wealth Management

M&A conditions unchanged; next 12-24 months offer sellers a stable regulatory environment.

Paul doesn't expect M&A conditions to change materially because Democrats have limited control over antitrust enforcement. Congressional hearings on big tech monopolies or data center buildouts could add headline risk and some efforts to slow deals. Corporate buyers are still paying a hefty premium compared with private equity counterparts, and a more permissive White House could motivate some PE buyers.

“So for sellers, the next twelve to twenty four months can offer a stable regulatory environment from a more permissive White House and might motivate some PE buyers.”at 5:26

Paul Hsiao · UBS Chief Investment Office, Global Wealth Management

Long-end yields unlikely to fall materially without a better fiscal picture; gridlock limits upside pressure.

Ten-year and 30-year yields are near their highest levels in at least recent memory. Fiscal concerns matter more than gridlock for yields. Gridlock is seen as stable, which reduces pressure for yields to rise further, but with wide deficits and expected Fed hikes, longer-end rates are hard to push materially lower. Financing costs will stay elevated, so business owners should lock in fixed rates when they can.

“ten year yields and thirty year yields are close to the highest points that they've been in, in at least recent memory. So unless the fiscal situation gets materially better, it's hard to see longer end rates keep going materially lower”at 5:26

Paul Hsiao · UBS Chief Investment Office, Global Wealth Management

Data centers and AI are unpopular across parties, so Democrats are campaigning to limit AI.

Paul says the US has been slower than Europe and China on AI regulation, but broadly the public dislikes data centers and AI on a bipartisan basis. He points to Democratic governors and candidates campaigning on limiting AI as evidence that pressure for regulation is building.

“broadly speaking, it remains data centers and AI remains unpopular on a bipartisan basis from the public. So we do have some democrats campaigning about limiting AI.”at 8:32

Paul Hsiao · UBS Chief Investment Office, Global Wealth Management

Chip stocks should reprice lower as a crowded trade, with data center limits threatening chip demand.

Semiconductors have already come under pressure over the past couple of weeks from higher rates and scrutiny of how sustainable the capex cycle is. Paul says data center limits actually threaten chip demand, so semis sold off significantly. He argues that because chips were already a crowded trade, it makes sense for them to reprice.

“For us, I think it makes sense for chips to reprice as an already crowded trade.”at 8:32

Paul Hsiao · UBS Chief Investment Office, Global Wealth Management

Slower data center buildout may keep data center energy costs flat or lower.

Paul argues that if data centers come online more slowly because of pushback and regulation, the energy costs tied to data centers might go down or stay stable. He frames this as a consequence of the slowdown in buildout, though it is a tentative view.

“So what this means is that the energy costs related to data centers might go down or remain stable”at 8:32