By Niket Nishant and Caroline Valetkevitch
Nov 5 (Reuters) - Big tech stocks slumped on Thursday in their biggest decline since the "Liberation Day" rout last year, extending what has been a punishing autumn for the AI trade.
The Nasdaq 100 index was set for market-value declines exceeding $2 trillion on investor fears that the Democratic Party's sweeping midterm victory could stall AI infrastructure expansion and force a chaotic reckoning for smaller firms whose capacity to raise funds has already
been limited by higher interest rates and tighter financial conditions.
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 of these stocks and the financing concerns that have shadowed the so-called neoclouds, smaller infrastructure firms such as Nebius and CoreWeave, since US interest rates rose late in the summer.
Shares of semiconductor and neocloud companies posted the most significant declines, reflecting worries that data center buildouts worth billions of dollars could face delays. The Philadelphia SE Semiconductor index fell as much as 11.2% to touch its lowest level in more than six months. Nvidia dropped 9% and Advanced Micro slumped 15%.
Many analysts said the scale of the declines, which have now extended into a second straight day, suggests sentiment is changing, which could portend further selling, likely starting with Friday's market sessions in Asia. Japan's Nikkei and Korea's Kospi have risen strongly this year, both up more than 20%, but they declined significantly following Wednesday's Wall Street rout and might be expected to do the same on Friday.
"Despite the magnitude of today’s move, volatility has not yet reached the capitulation or contrarian extremes historically associated with capitulation points," said Adam Turnquist, chief cross-asset strategist for LPL Financial in Charlotte, North Carolina.
LOSING BIG IN A ONCE-HOT SECTOR
Hyperscalers, which defied Wednesday's broad tech selloff, also dropped. Amazon.com fell 2.5% and Alphabet slid 2%.
The selling suggests investors are starting to account for the unpopularity of the data-center buildout, with some skeptics saying the costs it has imposed on US communities have yet to be fully considered.
"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, highlighting the threat to 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
CoreWeave, which has become a barometer of investor anxiety over heavy AI spending and the need shared by many of these companies to regularly access market financing, slumped 10%. Its five-year credit default spreads, which measure market expectations of a potential default, widened to a record high, according to S&P Global Market Intelligence data.
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 sharp declines put the Nasdaq Composite on track to enter correction territory, defined as a 10% drop from its recent peak. The Nasdaq 100 was last down 5.9%.
"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 about 6%, while Constellation Energy slipped 3%.
Microsoft declined 2%. 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)
