By Niket Nishant and Caroline Valetkevitch
Nov 5 (Reuters) - The Democratic sweep in Congress devastated US stocks on Thursday, with the tech-led Nasdaq notching its deepest one-day drop since ‘Liberation Day’ in April 2025 and wiping out trillions in market value on fears of more AI scrutiny, particularly on data center construction.
The Nasdaq Composite fell 5.5% on investor fears that the Democratic Party's sweeping midterm victory could stall AI infrastructure expansion and force a reckoning for smaller
firms whose capacity to raise funds has already been limited by higher interest rates and tighter financial conditions.
It was the second straight day of selling in AI stocks and the fifth decline of more than 500 points in the Nasdaq Composite since mid-October, as the previously buoyant AI trade has come under increasing scrutiny in the last several weeks.
"The big election outcome was, especially with the Democrats winning a lot of the governorships, that the slowdown of the data center buildout is the real key theme that's going to stick," said Michael O'Rourke, chief market strategist at JonesTrading in Stamford, Connecticut.
The Nasdaq Composite is now in correction territory, having lost nearly 12% from its record close on October 6. A correction is defined as a 10% drop from a recent peak.
Many analysts said the scale of the declines suggests further selling is at hand, likely starting with Friday's market sessions in Asia. Japan's Nikkei and South Korea's Kospi have risen more than 20% this year, but they fell significantly following Wednesday's rout in data center shares.
Some analysts wondered if the scale of the wipeout could affect the timing of Anthropic's blockbuster IPO expected this fall, as any delay could amplify market sentiment.
Analysts and portfolio managers said declines in once-hot areas such as semiconductors and AI infrastructure weren't entirely surprising, given the scale of earlier gains in many stocks and the financing concerns that have shadowed neocloud firms such as Nebius and CoreWeave since US interest rates climbed late in the summer.
Chip and neocloud shares posted the most significant declines on Thursday, reflecting worries that data center buildouts worth billions of dollars could face delays. The Philadelphia SE Semiconductor index fell 12% to touch its lowest level in more than six months. Nvidia dropped 9% and Advanced Micro slumped 17%.
Wall Street's fear gauge, the VIX index of expected price swings, posted its largest increase since December 2024.
LOSING BIG IN A ONCE-HOT SECTOR
Hyperscalers, which defied Wednesday's AI selloff, also dropped. Amazon.com and Alphabet each slid 2.2%. The Nasdaq 100 index, composed of the biggest names in the broader index, fell 6.4%, erasing $2.5 trillion in market value.
The selling suggests investors are starting to factor in increased local opposition to the data center buildout, with some analysts saying markets have yet to fully consider the costs it has imposed on US communities.
"There's going to be a lot of pushback about those data centers being geographically located in someone's backyard, straining the power grid, straining the water systems," said Bruce Zaro, managing director at Granite Wealth Management in Plymouth, Massachusetts. "Although there are a number of data centers already approved, there are still a lot to be permitted. There's going to be a difficult road to get those permitted forthcoming."
Around 30% of expected US data center capacity additions in 2028 could be at risk from potential construction pauses, UBS analysts estimated, threatening an industry whose growth depends on a rapid buildout of new facilities.
The political jitters are hitting an AI trade already on shaky footing due to worries about the return on investment for the enormous sums being poured into the technology.
AI WINNERS WILT
Neocloud company CoreWeave, which has become a barometer of investor anxiety over heavy AI spending and borrowing, slumped 10%. Its 5-year credit default swap spreads, which measure market expectations of a potential default, widened to a record 1,267.9 basis points, according to S&P Global Market Intelligence data.
Spreads on Intel's 5-year credit default swaps also hit a record 149.7 bps.
Nebius, another neocloud company, dropped 15%. Shares of both firms have dropped by half or more since the Nasdaq Composite hit a record on October 6.
"The market's moving from the promise of AI to the price of AI," said Ted Parkhill, founder and CEO of Incline Investment Management.
"There's no question that AI is going to be transformative for the world in the long run. But that doesn't mean every AI-related stock is currently priced appropriately. There's going to be a lot of turmoil."
Data center operators Applied Digital, Cipher Digital and IREN tumbled more than 14% each.
The weakness extended to utilities and equipment suppliers exposed to the buildout. GE Vernova fell 7.4%, while Constellation Energy slipped 2.5%.
Microsoft declined 3.6%. The company is tightening oversight of some data center projects from Nebius, IREN and Nscale, Bloomberg News reported.
(Reporting by Niket Nishant and Shashwat Chauhan in Bengaluru and Caroline Valetkevitch in New York; Editing by Anil D'Silva, Arun Koyyur, Colin Barr and David Gaffen)
