To The Moon

Technology stocks are facing pressure at a time when investors have several reasons to reassess their exposure. On Monday, the Nasdaq-100 tracking ETF QQQ fell 1.37%, while the S&P 500 declined 0.52%, reflecting continued weakness in parts of the technology sector.

The upcoming US midterm elections add another layer of uncertainty. All 435 House seats and 35 Senate seats are being contested, and the results could influence expectations around corporate taxes, technology regulation, AI data-centre permits and government spending.

However, I don’t think the election itself is the only issue investors should be watching. The bigger concern is how political uncertainty interacts with already elevated expectations for technology earnings and AI infrastructure investment.

1. Elections create uncertainty, but earnings still matter

Changes in the balance of political power can influence the direction of legislation and regulation. For technology companies, potential policy changes around AI infrastructure, energy access, data-centre approvals and corporate taxation could affect long-term investment decisions.

A divided Congress could make major legislative changes more difficult, potentially limiting some immediate policy shifts. On the other hand, a closely contested result or prolonged uncertainty could create short-term volatility as investors reassess potential policy outcomes.

But political headlines should not automatically determine investment decisions.

A technology company with strong revenue growth, healthy margins and reliable cash flow may be better positioned to manage uncertainty than one relying heavily on optimistic future expectations.

2. AI infrastructure spending is a bigger question than election headlines

One of the most important issues for technology stocks is whether the enormous investment in AI infrastructure will generate adequate returns.

Hyperscalers are committing substantial capital to data centres, computing equipment and energy infrastructure. This creates opportunities for semiconductor companies, cloud providers and businesses supplying the infrastructure.

However, higher capital expenditure also raises questions about depreciation, financing costs, electricity availability and future returns on investment.

If AI spending continues to increase faster than the revenue it generates, investors may become more selective about which companies deserve premium valuations.

This is particularly important because political uncertainty and concerns about AI investment returns could put pressure on technology valuations at the same time.

3. Watch QQQ earnings breadth, not just the index

QQQ is heavily influenced by large technology and growth companies. Its performance can therefore hide significant differences between individual businesses.

I would pay attention to earnings breadth: how many companies are actually delivering stronger revenue growth, improving earnings and positive forward guidance?

If only a handful of mega-cap technology companies are supporting the market, the rally may be less resilient than the headline index suggests.

On the other hand, if earnings strength begins spreading across semiconductor companies, software businesses, cloud providers and other sectors, it would suggest that market participation is improving.

For me, broader earnings participation would be a more convincing sign of underlying strength than a short-lived bounce in a few popular technology stocks.

4. Are investors moving towards defensive assets?

The S&P 500 provides another useful signal because it offers a broader picture of market conditions beyond technology.

If technology shares weaken while defensive sectors such as consumer staples, healthcare and utilities attract more interest, it could indicate that investors are reducing exposure to riskier assets.

Demand for short-term US Treasury bills is another indicator worth monitoring. These securities can appeal to investors seeking liquidity and relatively lower interest-rate risk compared with longer-duration bonds.

However, stronger demand for Treasury bills does not automatically mean investors expect a major market decline. It may simply reflect a preference for flexibility while waiting for greater clarity.

The important thing is to look at several indicators together rather than treating one day’s market movement as proof of a wider change in sentiment.

5. Hedging does not have to mean abandoning technology stocks

I would be cautious about making large portfolio changes purely because an election is approaching.

Trying to predict the market’s reaction to political results is difficult. Even when the outcome is known, investors may respond differently depending on what was already priced into share prices.

There are more practical ways to manage uncertainty.

Investors can review how concentrated their portfolios are in a small number of technology companies, maintain some cash for opportunities and avoid excessive leverage.

For those with significant exposure to high-valuation growth stocks, reducing position sizes or using appropriate hedging strategies may help manage downside risk.

The objective should not necessarily be to exit the market. It should be to avoid having a portfolio that depends on every political or economic development producing a positive outcome.

My investment view

I would not make the midterm elections the main reason to buy or sell technology stocks. Political developments matter, but company fundamentals and valuations will ultimately have a greater influence on long-term investment returns.

The three indicators I would watch are:

• QQQ earnings breadth: Is earnings strength spreading beyond a small group of mega-cap companies?

• S&P 500 defensive performance: Are investors becoming more cautious across the broader market?

• Short-term Treasury demand: Is there evidence that investors increasingly prefer liquidity while waiting for clarity?

If technology earnings remain strong and market participation broadens, election-related weakness could prove temporary. But if defensive sectors strengthen, Treasury demand increases and earnings expectations begin falling, that would suggest investors are becoming more cautious for reasons beyond the election.

For me, the most important distinction is whether the market is simply reacting to political uncertainty or beginning to question the financial returns from the AI investment cycle.

For discussion purposes only. Not financial advice.