• Cost of capital challenge for exit-hungry sponsors
• AI debt issuance drop hints at ROI, regulatory concerns
• Trump’s post-midterms tilt highly consequential

When is a slowdown not a slowdown? Sure, 3Q global volume fell 7% year-on-year – but at USD 1.23bn, it remained heartily respectable. We may no longer be on track for 2026 to outpace 2021’s record haul, but this will be a vintage year.

Still, what optimists hope was merely a pause for breath ahead of the US midterms might yet become a sustained hiatus if corporate America takes time to evaluate the scale and impact of a possible blue wave.

And the M&A market feels caught at a crossroads both sides of the pond.

Yes, the scale premium stands – you can expect two or three further turns of EBITDA on a valuation multiple for growing into the big leagues. And AI, energy transmission, defence and other strategic sectors remain ripe for capital expenditure and consolidation.

But the utility of bulking up via acquisitions as a hedge against geopolitical disruption may be weakened when related risks seem only to grow more entrenched each day.

Especially when that hedge becomes more expensive. Inflationary pressure continues to mount in ways the Fed and other major central banks cannot ignore. Sovereign debt yields are worryingly elevated and a host of elections across Europe throughout 2027 increase the risks of grandiose promises and major policy missteps.

A higher sustained weighted average cost of capital is miserable for sponsors managing heavily leveraged assets – especially those bought at the top of the market in 2020-2022 that desperately need to move to realisation.

Against such a febrile backdrop, corporates, private equity and advisors alike will need to proceed with caution, as no one will want to be the wrong side of the inflection point if a major market correction occurs.

AI prompts concern

No factor has been more debated over the past year than the prospect that overcooked AI valuations could precipitate that correction.

It seems that a muted 3Q for M&A was accompanied by a substantial slowing in AI-related debt issuance. Just USD 23bn in such paper was printed in September, down more than 50% on the level seen the previous month, according to Morgan Stanley research.

CoreWeave’s stock market woes mean the pain isn’t limited to the fixed income arena, not that its bonds have been left unscathed.

The rallying cry for AI infrastructure buildout had been “build it and they will come”. The question now is “sure, but will they pay for it?”

Return on investment is hotly watched just as frontier model providers such as Anthropic, OpenAI and Google parent Alphabet contend with cheaper competition and widespread concerns over lack of regulatory oversight of the technology.

Anthropic’s warning this week that AI models are potentially only “months away” from being capable of self-replicating and seeding into internet-enabled hardware opens up yet another front in cyberattack wars proving so costly to businesses globally.

One man risk

Not that any of this appears to give President Donald Trump much cause for concern, happy as he is to allow the hyperscalers to mark their own homework. Trump’s singular contribution to the debate this week was to post an AI-generated video of the leader of the free world hugging a tiger.

This might eventually prove an ironic metaphor.

The US president’s diesel deal with Russia at the end of last week left western allies shocked, if not surprised. Faced with the prospect of US dollars indirectly funding Russia’s invasion of Ukraine, the latter’s President Volodymyr Zelensky reacted with cold fury.

It’s probably what Trump hoped for – ahead of the midterms, it’s considerably more convenient to somehow blame Zelensky for high diesel prices than to point the finger at the ongoing mess of US military action against Iran.

But it might not be enough. If Democrats do manage to win back the House of Representatives – and perhaps even the Senate – there’s no telling what a wounded Trump might do next.

As we’ve seen both from Liberation Day last year and the Iran strikes started back in February, Trump’s impulses can have dramatic market impacts if surfaced via executive action.

The most substantial of these is inflation, which continues to be very sticky. September’s US CPI did not provide any respite, coming in at an annualised 3.7%. Gasoline prices rose 9.1% month-on-month – meaning they are up 34.2% YoY.

Likely unwilling to be seen interfering in the midterms – and with the fig leaf that it wants to see how its September hike has played out – the Fed will surely hold rates later this month. But there is a 90.6% chance of the Federal Open Market Committee raising the target rate again in early December, according to CME Fedwatch.

And it’s not just the base rates hurting corporates and sponsors. Having been almost somnambulant since the spring despite myriad episodes of volatility, US high yield spreads are finally widening, now averaging 325bps. That’s a 25% hike since late August.

Price pressures are not limited to the US. Many European governments are staring down the barrel at tough elections, despite deteriorating living standards being determined by major strategic forces out of their control.

Spain (November 2026), France (April-May 2027), Greece (mid-2027), Poland (autumn 2027) and Italy (by end-2027) are among European Union (EU) members going to the polls over the coming year. Germany’s beleaguered grand coalition led by centre-right Chancellor Friedrich Merz will likely not collapse – but he will surely be forced out before the end of 2027.

It’s not hyperbole to say the EU’s strategic positioning – on Ukraine, energy, the desire to scale European corporate champions, badly needed capital markets reforms, immigration and much else besides – hangs on this series of political milestones.

If deglobalisation has been characterised by Trump’s rupture with the postwar international order, it’s been left to corporations to pick up the pieces. The race for scale is as much about safeguarding supply chains, lines of capital and market access as it is chasing those multiple bumps.

That impetus remains logical, as evidenced by BASF’s pursuit of fellow Frankfurt-listed chemicals player Evonik, or Paris-listed Schneider Electric’s gambit to create an energy and intelligence giant with its USD 23bn acquisition of Nasdaq-listed PTC.

But as the accumulation of policy errors forces the cost of capital higher, the risk is that due diligence timetables will get longer still, valuation gaps will grow – and deal volumes will fall.

A lifelong developer, Trump’s surely aware of how consequential the one square foot of intellectual real estate above his shoulders is for the global economy. Isn’t he?

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.