More than $3.2 trillion (£2.4 trillion) was erased from the value of the US stock market on Thursday, as technology stocks plunged in a rout that rippled through Asia and Europe on Friday. The tech-heavy Nasdaq fell 5.5% and the blue-chip S&P 500 dropped 4.4%, though US markets rebounded after trading reopened in New York without recovering all losses amid concerns of further selling pressure.
The sell-off was triggered by the Democrats' sweeping US midterm election victory, which sparked investor fears of tighter regulation on artificial intelligence and datacentre construction. Investors predict a Democrat-controlled Congress could slow development in one of the engines of global economic growth and corporate earnings. Many Democrats campaigned on challenging big tech and called for moratoriums on datacentre construction, with several states effectively putting the issue to voters amid growing public opposition to vast, resource-hungry facilities. Elon Musk, the SpaceX and Tesla CEO, had set a record for election spending by pouring nearly half a billion dollars into backing Republicans and moved his personal residence to Texas, the leading state for datacentre construction. Shares in both his companies fell sharply after the midterms.
Concerns about an AI bubble have mounted for months, with valuations of technology companies becoming increasingly detached from reality according to analysts. The cyclically adjusted price-to-earnings ratio reached its highest level since 2000, indicating the US stock market was unusually highly valued relative to profits. Alphabet, Google's parent company, saw shares plunge last week after reporting lower than expected profits, wiping more than $500 billion from its value.
The fallout has worldwide consequences because the "magnificent seven" tech stocks, Nvidia, Apple, Google, Microsoft, Meta, Amazon and Tesla, account for more than a third of the S&P 500, meaning that funds tracking this index are directly tied to their performance. A sustained tech sell-off could prove a significant setback for countries that have pinned hopes on the AI revolution creating jobs and generating a productivity boost. Ben Barringer, head of technology research at Quilter Cheviot, warned that a virtuous circle could quickly turn into a vicious one and investors must "ride it out until the direction of travel becomes clearer."
However, some experts see the rout as a market reset rather than lasting downturn. Mark Haefele, chief investment officer at UBS Global Wealth Management, said the AI investment cycle should remain intact despite the latest "market indigestion", adding that fundamentals do not justify a prolonged downturn. Demand for AI and semiconductors will not vanish overnight, with new tools continuing to be launched and datacentres being built.