AI stocks plunge as US midterms wreak market havoc

Share markets are reeling in the wake of the US midterms, as a mass sell-off of AI stocks sends values plummeting.

The tech-heavy Nasdaq 100 dropped 6.3 per cent, wiping out $US2.3 trillion ($3.3 trillion) in market value.

AI stocks had been a major market booster, particularly with the Trump administration coming down firmly on the side of tech companies and opposing industry regulation.

But with the Democrats sweeping to victory and claiming majorities in both houses of Congress, and Texas in particular turning blue, a new reckoning has emerged in the markets.

Australian Financial Review economics editor John Kehoe said the Nasdaq had fallen more than 5 per cent overnight, and 10 per cent in the past few days.

“There’s concerns among investors that Democrats over there in America are going to crack down on AI, regulate it harder, make it more difficult to build data centres,” he told Today.

Republican mega-donor Elon Musk’s companies have suffered particularly heavy losses.

“Tesla and SpaceX are both headquartered in Texas, where Democrats have just won the governor’s race and a Senate seat, and both stocks fell on Wednesday, even as the broader market rose and rival EV makers gained,” APAC lead analyst for investment website etoro Josh Gilbert said.

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“That split shows investors are singling out Musk’s exposure to the election result, given he has been a major Republican donor.“

He said Texas was meant to be the “low-friction home for the Musk empire”, but investors now faced mounting concerns about delayed payoff.

But overall, Gilbert said, the AI surge wouldn’t stop overnight, with Trump still in the White House for two more years.

“If data centres become harder and more expensive to build, that’s a real headache for the companies relying on future projects, and while the cash-rich giants are better placed to absorb delays, less capacity could still hold back the returns they’re counting on from AI,” Gilbert said.

“Companies that already have facilities, power and approvals in hand look best placed to ride it out.”

Shares of chipmakers and the “picks and shovels” of the data centre buildout and AI boom are selling off as investors mull the implications of Democrats winning races in states like Texas that are hubs for planned data centres.

Nvidia shares sank 7 per cent Thursday US time, erasing their gains for this year. A closely watched index of chipmakers dropped 10 per cent. Shares of Elon Musk’s Tesla and SpaceX dropped 11 per cent and 9 per cent, respectively.

Shares of CoreWeave and Nebius, two neoclouds that rent out compute power for the AI boom, plunged roughly 11 per cent and 15 per cent, respectively.

Investors are also punishing companies who miss any earnings or forecasts. Qualcomm on Wednesday missed estimates and said higher memory chip costs are hurting sales, similar to Intel’s guidance last week. Qualcomm shares dropped 11.5 per cent Thursday, set for their worst day since March 2020.

Wall Street’s fear gauge, the VIX, which measures expectations for volatility, surged 50 per cent and hit its highest level in seven months.

Keith Lerner, chief investment officer at Truist Advisory Services, saw this week’s volatile moves as more of a knee-jerk reaction than a real indication of how stocks, particularly tech, could fare under Democratic control of Congress.

Investors have largely struggled to make sense of whether reining in the AI buildout could create unique investment opportunities or lead to more problems.

On Wednesday, shares of Amazon, Meta and Google – often referred to as hyperscalers in the AI buildout – surged on momentum that the rollout of new restrictions would help free up cash that would otherwise go toward investing in data centres, and thereby increase profitability. By Thursday, however, investors soured on those trades, likely fearing that new restrictions would be a net negative.

While data centres are increasingly essential to powering everything from AI to the broader internet, the breakneck pace of construction has raised questions about whether companies are overbuilding — potentially committing to more computing capacity than demand will ultimately justify.

Ed Yardeni, president of Yardeni Research, sees a potential silver lining from the pullback in the AI trade and obstacles to building data centres.

“We want a slowdown in the AI buildout. It was too frenzied and speculative,” Yardeni told CNN.

“Now we are letting air come out of the AI bubble. It’s better to let air come out of the AI bubble than let it burst.”

At the same time, the tech sell-off represents a rare opportunity where the sector is by far underperforming the S&P 500. At a certain point, this kind of bargain could start to look increasingly attractive to investors and cause them to swoop up shares, said Truist’s Lerner.

“In our view, the risk-reward is improving for longer-term investors,” he said.

Tech overall has been on a rollercoaster this year and is likely to continue with Anthropic’s upcoming IPO and OpenAI’s expected IPO next year.

The Nasdaq, which skews heavily toward tech companies, closed in correction in March, rallied back to record highs in early June, stumbled and nearly fell into correction in late July, then reclaimed record highs in September and October — before sliding into correction territory again on Thursday.

With CNN.