UBS CEO warns: A Democratic sweep could slow AI capacity buildout; valuation doubts are "very important"

UBS Group CEO Sergio Ermotti said a Democratic sweep in the US midterm elections could trigger a slowdown in AI capacity buildout. "Investors are rightly questioning how much value this cycle can actually create," he said in an interview in Sydney on Monday. "The question is more about timing how quickly you can actually deliver all of these returns. In that sense, you'll see some doubts around valuations, and that's important." Candidates advocating stricter regulation of AI won in several key congressional races. After high-valuation tech stocks fell, investors are reassessing valuations, and this development has added to an already fragile global market environment. "US political developments could also trigger a slowdown in capacity buildout," Ermotti said. The AI cycle "will definitely be a very strong growth engine over the medium to long term. 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 doubts over whether massive technology spending will pay off. With Democrats expected to control Congress, regulation will tighten, exacerbating concerns about the growth prospects of chipmakers and data center suppliers and driving US tech stocks to their steepest decline since 2020. Ermotti also said inflation remains a key risk that markets are struggling to price. Last week's strong jobs data reignited expectations that the Federal Reserve may raise rates again. "The stickiness of inflation, and the possibility that central banks may need to keep rates high for longer than expected, is perhaps still underestimated," he said. Ermotti also said he wants to see European policymakers show greater willingness to address fiscal concerns. Asked whether he was worried about the stability of Europe's financial system after a surge in French bond yields, Ermotti explained his concern. "'Worried' may be putting it too strongly, but what I'm concerned about is that things won't be treated seriously enough and quickly enough to resolve 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."