On November 5, big tech stocks experienced a significant slump, putting them on track for their largest decline since last year's "Liberation Day" rout. The Nasdaq 100 index was set to decline by over $2 trillion in market value due to investor fears that the Democratic Party's midterm victory could stall AI infrastructure expansion. This has raised concerns about a chaotic reckoning for smaller firms with limited capacity to raise funds.
The decline in tech stocks was led by semiconductor and neocloud companies, which reflected worries about potential delays in data center buildouts worth billions of dollars. The Philadelphia SE Semiconductor index fell by as much as 11.2% to its lowest level in over six months. Notable declines included Nvidia, which dropped by 9%, and Advanced Micro, which slumped by 15%.
Hyperscalers, which defied the previous day's broad tech selloff, also experienced a decline. Amazon.com fell by 2.5%, while Alphabet slid by 2%. The selling suggests that investors are starting to account for the unpopularity of data center buildouts, with some skeptics arguing that the costs imposed on US communities have yet to be fully considered.
Analysts and portfolio managers stated that the declines in once-hot areas such as semiconductors and AI infrastructure were not entirely surprising, given the scale of earlier gains in many of these stocks and financing concerns. However, the scale of the declines for a second straight day suggests a change in sentiment that could portend further selling.
According to Bruce Zaro, managing director at Granite Wealth Management, there will be a lot of pushback about data centers being geographically located in someone's backyard, straining the power grid and water systems. Around 30% of expected US data center capacity additions in 2028 could be at risk from potential construction pauses, UBS analysts estimated.
The sharp declines put the Nasdaq Composite on track to enter correction territory, representing a 10% drop from its recent peak. The Nasdaq 100 was last down 5.9%. CoreWeave, which has become a barometer of investor anxiety over heavy AI spending, slumped by 12%, while its five-year credit default spreads widened to a record high.
As the market moves from the promise of AI to the price of AI, investors are becoming increasingly cautious. According to 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.
Key points
- The Nasdaq 100 index was set to decline by over $2 trillion in market value.
- The Philadelphia SE Semiconductor index fell by as much as 11.2%.
- Around 30% of expected US data center capacity additions in 2028 could be at risk from potential construction pauses.
