Following Democrats' significant success in Tuesday's midterm elections, investors are reassessing the artificial intelligence trade amid concerns that the incoming administration may implement restrictions on data center buildout [1]. Wall Street analysts note that Democrats are more aggressively anti-data center than Republicans, prompting a fundamental recalculation of growth forecasts [1]. Peter Boockvar, chief investment officer at One Point BFG Wealth Partners, stated that "investors are questioning that $1.2 trillion of capex that we forecast for next year" and believes "this could be the start of the end of the AI trade as we know it" [1].
The market reaction was severe on Thursday, with the Nasdaq Composite dropping 5% and falling into correction territory, down more than 11% from its record high set last month [1]. The iShares Semiconductor ETF (SMH) experienced its largest single-day decline since March 2020, dropping 11%, while the Global X Artificial Intelligence & Technology ETF (AIQ) fell 6% on the day and 15% over the past month [1]. The selling extended beyond AI-focused stocks, with the Dow Jones Industrial Average declining more than 1,600 points [1]. Eric Johnston, head of equities at Cantor Fitzgerald, emphasized that "there has been a huge change in the outlook for AI infrastructure buildout" and that "the entire economy and the consumer and earnings growth are all levered to that buildout" [1].
Additionally, Josh Brown highlighted that the 4.8% yield on the 10-year Treasury is providing a compelling risk-free rate, causing investors to reconsider exposure to volatile AI stocks [1]. However, some analysts remain selective rather than completely bearish on the sector. Rob Sechan, Newedge Capital Group Founder & Managing Partner, noted that "the AI buildout just got harder" but argued that "when new capacity gets harder to build, existing capacity becomes more valuable," citing Microsoft's Azure cloud business growing 48% year-over-year in its most recent third quarter as evidence of capacity constraints rather than demand constraints [1]. Overall, investors are being advised to reassess their AI trade positioning and become more selective in their approach [1].
CONCLUSION
The AI trade faces significant headwinds following Democrats' midterm election victory, with investors now questioning the $1.2 trillion capex forecast for next year amid potential data center restrictions [1]. While major indices and AI-focused ETFs experienced sharp declines, some analysts suggest selective opportunities remain in companies with existing capacity advantages [1]. The market consensus indicates a fundamental reassessment of AI investment strategy is underway rather than a complete abandonment of the sector [1].