Tech Stocks Plunge as AI Trade Unwinds After Midterms

Tech stocks were headed for their worst decline since June on Thursday, with the semiconductor index briefly falling by double digits in the latest autumn reckoning for the AI sector.

The SOX fell as much as 11%, its worst performance since March 2020, and the Nasdaq composite dropped as much as 5%, a decline that would confirm a correction denoting a 10% pullback from its record close on October 6. Advanced Micro (AMD), Sandisk, Micron (MU), Dell (DELL) and Marvell Technology (MRVL) were among more than a dozen large technology stocks down by double digits. In delayed trading, AMD was down 15.8%, MU down 15.3%, MRVL down 14.5%, DELL down 13.8% and Nvidia (NVDA) down 9.2%.

It is the latest in a string of selloffs for the AI sector in what has been a bruising month since the Nasdaq's record close on October 6. Selling in stock and bond markets has reduced access to financing for many participants in the data-center buildout, while Tuesday's US elections brought the passage of dozens of nationwide ballot initiatives that stand to limit building in coming months and years.

Adam Sarhan, chief executive of 50 Park Investments, said AI stocks were already in a private bear market, with the semiconductor index down about 31% from its 52-week high, and that large companies such as Apple were cutting back on AI spending because they were not seeing sufficient return on investment.

Mark Hackett, chief market strategist for Nationwide, said relatively weak earnings from Qualcomm and Arm Holdings reminded investors that fundamentals still matter, while the election was likely putting a governor on the speed of the AI buildout, which is particularly impactful to the semiconductor space and the neo-cloud space. He said the main driver was very aggressive institutional selling and de-leveraging by hedge funds and more active institutional managers, and that Thursday's move was an emotional sell-off.

Melissa Brown, global head of investment decision research at SimCorp, said investors appeared to be recognizing that some newly elected members of Congress and governors were looking to slow the pace of AI infrastructure development, and that any slowdown would raise concerns because the AI growth story has largely depended on the rapid buildout of supporting infrastructure.

Will Compernolle, macro strategist at FHN Financial, said there was a shift away from chipmaker stocks causing a bid for Treasuries, and that this week's results kind of codify what was already happening, which is that people do not want these things in their backyard. Bruce Zaro, managing director at Granite Wealth Management, said there was going to be a lot of pushback about data centers being geographically located in someone's backyard, straining the power grid and the water systems.

Peter Andersen, founder of Andersen Capital Management, said the sell-off was unwarranted and that investors were reorganizing their thoughts around the election results. He said that if data centers were not allowed to be built in the majority of US states, builders would go to Canada or Brazil, and that there would be plenty of workarounds.

What remains unclear is how much the newly elected officials will actually slow the AI buildout, and whether the selling marks a durable rotation or a short-term repricing. The next dated catalysts investors will watch are further company guidance and any policy signals from Washington.