$2.5 trillion wiped out as Democrats’ midterm victory rattles Wall Street’s AI trade

Wall Street’s artificial intelligence (AI) trade suffered a massive setback on Thursday as US stocks tumbled, with the Nasdaq Composite recording its steepest one-day fall since April 2025. Investors rushed to sell technology and semiconductor shares amid concerns that the Democratic Party’s sweeping victory in the US midterm elections could slow the country’s fast-growing data centre industry.

The Nasdaq Composite plunged 5.5 per cent, while the Nasdaq 100 index fell 6.4 per cent, wiping out $2.5 trillion in market value. The sell-off pushed the Nasdaq Composite into correction territory, with the index now down nearly 12 per cent from its record closing high on October 6.

The election outcome has added a fresh layer of uncertainty to an AI investment boom already facing questions over high borrowing costs, heavy infrastructure spending and the returns companies can generate from their investments in the technology.

Investors are particularly concerned that Democratic gains could strengthen opposition to new data centres and make it harder for companies to secure permits for large-scale projects.

Why Democrats’ victory has rattled the AI trade

The market reaction reflects growing concerns that the political environment could become less favourable for the rapid expansion of AI infrastructure in the US.

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Data centres require enormous amounts of electricity and water. Their construction has also faced increasing opposition from local communities worried about pressure on power grids, water supplies and the cost of electricity.

Democratic gains in governorships and Congress could strengthen calls for greater scrutiny of these projects, potentially slowing approvals for new facilities.

The potential consequences for the industry could be significant. UBS analysts estimate that around 30 per cent of expected US data centre capacity additions in 2028 could be at risk from possible construction pauses.

That prospect has unsettled investors who have been betting on continued expansion in computing capacity to support the growth of AI applications.

Nvidia, AMD and semiconductor stocks lead losses

Semiconductor companies and firms operating cloud infrastructure recorded some of the steepest declines on Thursday.

The Philadelphia Semiconductor Index fell 12 per cent, touching its lowest level in more than six months. Nvidia shares dropped 9 per cent, while Advanced Micro Devices (AMD) plunged 17 per cent.

The weakness also spread to companies directly involved in building and operating data centres.

Shares of data centre operators Applied Digital, Cipher Digital and IREN fell more than 14 per cent each. Nebius declined 15 per cent, while CoreWeave lost 10 per cent.

The concerns extend beyond smaller infrastructure companies. Amazon and Alphabet shares each declined 2.2 per cent, while Microsoft fell 3.6 per cent.

The sell-off also hit companies supplying electricity and equipment to the data centre industry. GE Vernova shares dropped 7.4 per cent, while Constellation Energy slipped 2.5 per cent.

Wall Street’s volatility gauge, the CBOE Volatility Index (VIX), recorded its biggest increase since December 2024, reflecting a sharp rise in investor anxiety.

AI infrastructure companies face funding concerns

The latest market rout has exposed another vulnerability in the AI investment boom. Many companies are spending heavily on infrastructure and relying on borrowing and access to capital markets to finance their expansion.

Higher US interest rates and tighter financial conditions have already made funding more expensive for smaller companies, particularly so-called neocloud operators that provide computing capacity to AI developers.

CoreWeave has become a closely watched indicator of investor concerns about the financial risks associated with AI infrastructure spending.

The company’s five-year credit default swap spreads, which measure the cost of insuring against a potential debt default, widened to a record 1,267.9 basis points, according to S&P Global Market Intelligence data.

Intel’s five-year credit default swap spreads also reached a record 149.7 basis points.

The pressure on these companies has been building for weeks. Nebius and CoreWeave shares have both lost at least half their value since the Nasdaq Composite reached its record closing level on October 6.

Is the AI investment boom losing momentum?

Thursday’s losses came after a second consecutive session of selling in AI-related stocks. It was also the fifth time since mid-October that the Nasdaq Composite had fallen more than 500 points in a single session.

The latest correction suggests investors are reassessing the valuations of companies that benefited from the AI investment boom over the past year.

Concerns about whether technology companies can generate sufficient returns from their enormous AI investments have also weighed on sentiment.

The market turmoil could have implications beyond listed technology companies. Analysts are also watching whether the sell-off affects the timing of Anthropic’s much-anticipated initial public offering, expected this autumn.

Meanwhile, the weakness in US technology shares could spill over into Asian markets. Japan’s Nikkei and South Korea’s Kospi, both of which have gained more than 20 per cent this year, have already come under pressure following the previous session’s decline in data centre stocks.

(With inputs from agencies.)