AI stocks wipe $3.2tn off Wall Street as midterm shock hits

Wall Street took a beating on Thursday. The tech-heavy Nasdaq dropped 5.5%, the blue-chip S&P 500 fell 4.4%, and more than $3.2tn vanished from the value of the US stock market in a single session — a sum larger than Canada's entire annual economic output. The sell-off rolled into Asia and Europe on Friday.

The spark, according to The Guardian, was the Democrats' sweeping victory in the US midterm elections. Investors are betting that a Democrat-controlled Congress will crack down on AI and datacentre construction, slowing the very engine that has been driving corporate earnings and global growth. Moratoriums on datacentre building were effectively on the ballot in several states, and opinion polls show most Americans oppose the vast, resource-hungry facilities.

Elon Musk is feeling it too. The SpaceX and Tesla boss poured nearly half a billion dollars into backing Republicans — a record for election spending — and shifted his personal residence to Texas, the country's datacentre capital. After the midterms, shares in both of his companies fell sharply.

The warning signs had been piling up for months. The cyclically adjusted price-to-earnings ratio, a classic overvaluation gauge, had climbed to its highest level since 2000. Alphabet offered a taste of the pain last week: the Google parent's shares plunged after profits came in below expectations, slicing more than $500bn off its value. The stakes are enormous for savers worldwide, because the 'magnificent seven' — Nvidia, Apple, Google, Microsoft, Meta, Amazon and Tesla — make up more than a third of the S&P 500.

The macro backdrop isn't helping. Central banks have been hiking interest rates to fight the inflation shock from the Iran war, and a slowdown could force them to rethink as stagflation risk looms. Until now, the AI boom had helped cushion the world economy from the Middle East conflict, and a sustained tech slump would hit countries banking on AI to create jobs and lift productivity.

Not everyone is panicking. Ben Barringer, head of technology research at Quilter Cheviot, said it's too easy to assume Democrats will be bad for datacentres, pointing to Texas governor-elect Gina Hinojosa's pragmatism. But he warned a virtuous circle could quickly turn vicious, and investors must ride it out. Mark Haefele, chief investment officer at UBS Global Wealth Management, called the rout market indigestion and said the AI investment cycle should stay intact. 'We do not think fundamentals justify a prolonged downturn,' he added.