Nasdaq Crashes 5%, Down 11% In A Month: What's Behind Bloodbath In US Chip Stocks?

The sell-off in artificial intelligence-linked stocks on Wall Street has gathered pace following the Democratic Party’s sweeping victories in the November 3 midterm elections, with investors increasingly concerned about the future of large-scale data centre projects and the billions of dollars being poured into AI infrastructure.

The tech-heavy Nasdaq Composite fell 5.30% by 15.56 GMT on Thursday, with semiconductor stocks bearing the brunt of the decline. Industry heavyweight Nvidia dropped 8.27%, while rival Advanced Micro Devices (AMD) plunged 15.62%. Micron Technology also fell sharply, losing 14.77%.

The latest losses have pushed the Nasdaq Composite 11% below its record closing high of 27,599.89, recorded on October 6. A decline of this

magnitude from a recent record high is widely regarded as a market correction. If sustained, it would mark the index’s second correction this year.

The scale of the sell-off reflects a broader reassessment of the AI investment boom, with investors questioning whether the enormous spending commitments made by technology companies can generate returns quickly enough to justify their valuations.

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Why Are US Chip Stocks And AI Shares Falling?

The latest political developments have added another layer of uncertainty to an already nervous market. Democrats’ gains in both chambers of Congress have raised concerns among investors about a potential shift in policy towards artificial intelligence, particularly regarding data centre construction, energy consumption and environmental regulations.

A change in political control can bring significant uncertainty for businesses that have made long-term investment commitments based on existing policy expectations.

“When you go from full unified control under one party to full unified control under another party that can also represent quite a bit of uncertainty, discontinuity and abrupt change to policy,” said Sameer Samana, senior global market strategist at Wells Fargo Investment Institute.

“When it looked like the Democrats were going to take significant majorities in both the House and the Senate, we thought that at the very least, it would lead to markets taking a little bit of a pause.”

However, political uncertainty is only one part of the problem. Investors have also become increasingly cautious about the financial sustainability of the AI infrastructure boom.

Growing Questions Over Billions In AI Spending

The enthusiasm surrounding artificial intelligence has fuelled massive investments in data centres, advanced semiconductors and computing infrastructure. However, the scale of these commitments is now prompting questions about how quickly they will translate into sustainable profits.

Several major technology companies have turned to debt markets to finance billions of dollars in planned investments in data centres, chips and other infrastructure needed to support AI development.

This has raised concerns about rising borrowing costs and the possibility that companies may be committing too much capital before the commercial returns become clear.

Sentiment towards AI-linked stocks had already deteriorated in recent weeks. The Nasdaq shed more than $2.5 trillion in market value in October, reflecting growing investor concerns about stretched valuations and the returns expected from AI investments.

Earnings reports from major cloud and technology companies, including Alphabet and Meta, last month did little to reassure investors. Their results and spending plans have further intensified scrutiny of the costs associated with expanding AI infrastructure.

Persistent geopolitical tensions in the Middle East and concerns about prolonged inflation have also kept borrowing costs elevated, adding to the pressure on technology companies that rely on substantial capital investments.

Why Are Data Centres Facing Political Opposition In The US?

Beyond financial concerns, the rapid expansion of data centres is increasingly becoming a political issue across the United States.

These facilities require enormous amounts of electricity and fresh water to operate and cool their servers. Their growing demand for local resources has triggered concerns among communities over water shortages, higher utility costs and pressure on existing infrastructure.

Opposition to new data centre projects has emerged across party lines, making the issue particularly significant for investors and technology companies planning further expansion.

Several candidates who won in the November 3 midterm elections had pledged to introduce stricter oversight of data centre developments, including proposals for temporary moratoriums on new projects.

In Texas, where both the Senate and governorship were won by candidates supporting greater regulation of data centre expansion, the issue featured prominently during the election campaign.

Gina Hinojosa, a lawyer who defeated outgoing Texas Governor Greg Abbott, called for an immediate halt to new data centre developments until lawmakers could establish stronger safeguards.

“We need an immediate moratorium on data centers to last until the legislature can meet to put in place real protections so Texans can have a seat at the table to decide if and how data centers come into their communities,” she said during the campaign.

Water consumption is among the biggest concerns surrounding these facilities. Data centres require substantial quantities of fresh water to cool servers and maintain operating temperatures, raising fears that rapid expansion could worsen local water shortages.