It might seem perversely contrarian to find cause for optimism in the wake of a market sell-off wiping USD 2.5tn from the Nasdaq Composite in a single day.

But if we look beyond the near-term implications of a midterm sweep for Democrats, pouring a bucket of ice on overheated AI capital deployment, and increasing pressure for a resolution to the Iran debacle, create deflationary pressures that should moderate the Fed’s rate hiking cycle.

And if global central banks no longer have to raise rates by the quantum current market expectations point to, as this column believes is likely, sponsors may benefit from some surprise breathing space to finance value creation and buyouts – once again grabbing the attention of LPs smarting from losses on other strategies.

Those losses may well be mounting. Sure enough, fears that Democrat success across both chambers of Congress and many state houses will stymie AI rollout took a heavy toll on tech names yesterday (5 November).

With the Nasdaq Composite tumbling 5.5% and the VIX spiking 57% to 26, chip behemoth Nvidia fell 9.26% and doubts mounted as to whether Anthropic can even undertake its IPO this month.

Indeed, Anthropic faces the kind of confounding quandary mere mortals would probably run by Claude. The prospect of substantially greater government scrutiny on the AI industry and state-level blocks on compute build-out vital for its equity story leaves the model giant with two unpalatable options: pull its IPO and confirm the death of the AI trade; or proceed anyway at a depressed valuation well below the much-touted USD 2bn, with the risk of a grim aftermarket…that could yet confirm the death of the AI trade.

The irony is this latest market rupture may well lay the groundwork for a more sustainable AI investment case.

Let’s take Texas. Democratic Governor-elect Gina Hinojosa will certainly extend Republican Governor Greg Abbott’s current freeze on data center permitting so “Texans can have a seat at the table” via state legislation. But with Texas already getting a quarter of its electricity from wind turbines, she’s far likelier to roll out the red carpet for renewables in the Lone Star state.

Factor that approach across the US and there is a far more credible all-of-the-above energy strategy for building out electricity infrastructure for data centers than the Trump administration’s current faux concern over bird populations and monomaniacal “drill, baby, drill” mantra.

Likewise, Ayn Rand-esque carping about the dead hand of state intervention is tough to deploy with a straight face when AI’s own Prometheans worry about their technologies potentially eradicating the human race. Political efforts to establish regulatory guardrails could enhance investor and customer confidence alike.

While admittedly longer-term plays, they are factors that should put a floor on necessary valuation corrections and provide upside potential for those who eventually seek to be greedy when others are fearful.

Sponsor breathing room

Whatever happens, AI-related capex in 2027 is now likely to come in well below the USD 1.6tn Goldman Sachs predicted back in May, with political forces adding to existing price war, open weight and local device inference pressures that, already this Fall, had slowed the formation of debt capital backing data center builds.

And as Continental Drift argued back in August, any fall in AI investment will dent animal spirits while tempering inflation expectations. That seems to be the case – though market volatility has spiked, the likelihood of a Fed rate hike next month has come down to 69% from 91% last month, according to CME Fedwatch.

Further moderating inflation expectations is the hope that the midterm election results could unlock a resolution to the Iran conflict. Vice President JD Vance was quick to level the charge that the war had cost the GOP dear given its impact on fuel prices.

With a majority that can even sidestep nominally Democratic Pennsylvania Senator John Fetterman, there will be votes among the Democratic caucus to pass a War Powers Resolution in January – almost certainly gaining the bipartisan support of Republican senators Rand Paul (Kentucky) and Lisa Murkowski (Alaska).

While President Trump’s quixotic behavior makes any prognostication a fool’s errand, fresh opposition from within the GOP and the newly elected Congress is a powerful counterweight against the post-midterms military escalation many had forecast.

Combine that with froth being whisked from the top of AI valuations and an end to hyperscaler investment crowding out sovereign and other capital issuance and, sure, 401ks may take a bath – but the yield curve will flatten further.

This would afford private equity precious breathing space for refinancing their portfolio companies, investing in value creation, and undertaking buyouts. It’s probably a hostage to fortune to mention it, but US high yield spreads tightened by 2.4% yesterday to 332bps, even as the market sell-off roiled stocks.

As hard as it may be to look beyond near-term volatility, there is a glidepath towards normalcy – and a soft landing – over the coming year. Especially for a sponsor community that would heartily welcome a more accommodative financing environment.

Continental Drift is a weekly column offering commentary on the macroeconomic, political, and policy forces shaping the M&A landscape across the US and Europe. The opinions expressed here are those of the writer only.