Sergio Ermotti, CEO of UBS Group, said that a Democratic sweep in the U.S. midterm elections could trigger a slowdown in artificial intelligence capacity buildout.
Speaking in an interview in Sydney on Monday, he said, "Investors are legitimately questioning how much value this cycle can actually create."
"The issue is more about timing — how quickly you can actually deliver on all of these returns. In that sense, you will see some doubts emerge around valuations, and that is very important."
Candidates advocating stricter regulation of AI won in several key congressional races. After high-valuation technology stocks fell, investors are reassessing valuations, and this development has added to an already fragile global market environment.
Ermotti said, "U.S. political developments could also trigger a slowdown in capacity buildout." The AI cycle "over the medium to long term will certainly become a very strong growth engine. In the short term, it may remain a highly volatile theme, which could in turn create potential volatility in financial markets."
The midterm elections have added a new catalyst for unwinding the AI trade. This follows weeks of market doubts over whether massive technology spending will generate returns. Under expectations that Democrats will control Congress, regulation is expected to tighten, intensifying concerns about the growth prospects of chipmakers and data center suppliers and driving U.S. technology stocks to their steepest decline since 2020.
Ermotti also said inflation remains a key risk that the market is struggling to price. Last week's strong employment data reignited expectations that the Federal Reserve may raise interest rates again.
"How sticky inflation is, and how much longer central banks may need to keep rates high than expected, is perhaps still underestimated," he said.
Ermotti also said he hopes to see European policymakers show greater willingness to address fiscal concerns. Asked whether he was worried about the stability of the European financial system after a sharp rise in French bond yields, Ermotti explained his concerns.
"'Worried' may be putting it too strongly, but what I am concerned about is that things will not be treated seriously enough or quickly enough to defuse contagion risk — that may be the most significant risk," he said.
"In that sense, I do hope the system will introduce emergency measures to contain this potential contagion."
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