Following the U.S. midterm elections, political forces opposing the unchecked expansion of AI gained momentum, compounded by tech giants missing earnings expectations and shifting prospects for data center development, triggering a historic sell-off in Wall Street’s AI trades. The Nasdaq lost approximately $2.5 trillion in market value in a single day, with chip stocks, energy stocks, and AI infrastructure companies all suffering sharp declines.
After the U.S. midterm elections, investors quickly realized that changes in Washington’s political landscape were disrupting Wall Street’s AI investment logic.
On Thursday, U.S. stocks suffered a broad sell-off, with almost no corner of the technology sector spared. Declines swept across the entire supply chain—from Asian chip manufacturers and Texas power producers to New Jersey computing service providers, Silicon Valley software companies, data center developers, and related contractors.
The combined market value of the tech sector's "Magnificent Seven" has declined by approximately $1 trillion. The Nasdaq Composite Index has entered a technical correction, with its total market value estimated to have shrunk by $2.5 trillion, marking the largest single-day market value loss in the index's history.
The Philadelphia Semiconductor Index posted its largest single-day decline since the peak of the COVID-19 pandemic. NVIDIA (NVDA.O), a representative company of the AI boom, closed down 9.26%, causing its cumulative performance since 2026 to turn negative.
The Dow Jones Industrial Average fell 1,833.06 points, or 3.44%, closing at 51,523.06. The S&P 500 dropped 4.36% to 7,353.73, and the Nasdaq Composite declined 5.52% to 24,315.
This sell-off did not occur in isolation. The AI industry had already been facing valuation and funding pressures; now, with Democrats regaining control of Congress and multiple governors elected who have pledged to limit data center construction, the market is reassessing the industry’s growth prospects.
Jonathan Corpina, Senior Managing Partner at Meridian Equity Partners, said: "It appears that the market's support is being pulled away. Amid the current uncertainties, the market remains extremely fragile."
Data center construction faces policy uncertainties, and valuations across the AI industry chain are being reassessed.
Just a few weeks ago, AI stocks were driving U.S. markets to new all-time highs, and investors were eagerly anticipating potential IPOs from Anthropic and OpenAI.
However, the investment thesis supporting this rally is beginning to show cracks.
First, high-risk areas in AI trading have begun to reveal problems. Some companies have accumulated massive debts in an effort to expand their operations. Disappointing earnings reports from Amazon (AMZN.O) and Alphabet (GOOGL.O), Google's parent company, have also unsettled traders.
Meanwhile, the market is beginning to question the sustainability of investments in AI infrastructure.
Previously, investors bet that the AI-driven rally would continue through 2027, primarily based on the belief that companies with strong computing power and infrastructure capabilities could sustainably generate remarkable profits.
Among them, companies such as NVIDIA and Micron (MU.O), which provide critical chips and storage products, are key beneficiaries of the AI investment boom. They offer essential hardware support for data centers and the AI industry, driving significant profit growth in this cycle.
But now, concerns that data center construction may slow are undermining this logic.
In the U.S. midterm elections, several governors who pledged to limit data center construction were elected. The Democratic Party’s regain of control over Congress also means the AI industry may face stricter policy scrutiny in the future.
Texas has become a focal point of the market. The state has the largest number of planned data center projects in the U.S. Previously, Wall Street generally believed that Governor Greg Abbott, a Republican, announced a pause on data center construction approvals primarily as a political gesture ahead of the election, with the restrictions expected to be lifted after the election.
But this judgment is being challenged.
Texas Democratic state representative Gina Hinojosa previously stated that the approval of new data center projects should remain paused until the state legislature convenes next year and passes “real protective measures.”
This has prompted investors to reassess the project's timeline for implementation and potential returns.
Mark Melchiorre, Chief Investment Officer at Forza Investment Group, a hedge fund focused on credit investments, said: "I don't think anyone anticipated the situation would become this complicated, whether in July or August. Some projects will stall."
The market is not concerned that all data center projects will be completely halted, but rather that approval and construction timelines may be extended. For companies that have already invested substantial capital, project delays could directly impact the timing of revenue realization.
Matt Rowe, Senior Portfolio Manager at hedge fund giant Man Group, explained: "Suppose you invest in a project expecting it to start generating revenue in six to twelve months, but then you realize it actually takes two to three years—now you’re facing a series of issues."
Such temporal changes may again impact a company’s financing arrangements, valuation, and profit forecasts.
Mike O’Rourke, Chief Market Strategist at JonesTrading, noted that changes in the political environment are particularly significant for markets, as AI infrastructure companies—especially semiconductor and memory chip firms—are key drivers of S&P 500 earnings growth.
He stated, "Due to market expectations of a shift in policy direction, next year's profit forecasts can no longer be considered reliable."
From supply chain divergence to a broad-based decline, market support rapidly collapsed.
Another notable feature of Thursday's sell-off was that even previously resilient large tech companies failed to remain insulated.
On Wednesday, markets began to worry about a slowdown in data center construction, leading to sell-offs of chipmakers, contractors, and other infrastructure firms. However, shares of major hyperscalers such as Microsoft (MSFT.O), Amazon, and Alphabet rose, offsetting some of the downward pressure and pushing major indices higher. On that day, the Dow Jones Industrial Average posted its largest single-day gain in nearly 19 months.
The divergence in stock prices between these large AI companies and supply chain firms persisted on Thursday. Although Microsoft, Amazon, and Alphabet closed lower, they largely avoided the most severe impacts of the broad sell-off in the AI supply chain.
There are also exceptions.
SpaceX is collaborating with Tesla (TSLA.O) to build a massive Terafab chip factory in Texas to support Elon Musk’s business plans. On Thursday, shares of both Tesla and SpaceX fell more than 9%.
Given Musk’s close ties to the Trump administration, this performance also indicates that traders are particularly sensitive to the policy and political risks facing his companies.
More importantly, when tech stocks previously declined, capital often shifted to other market sectors. But on Thursday, the selling spread to all sectors of the S&P 500, with not a single sector closing in positive territory.
The day's decline in the Nasdaq Composite Index marked the largest single-day drop since Trump announced tariff measures last year, which triggered significant market turmoil.
Colpina said: "When tech stocks lead the market, it's easy for investors to follow suit and buy. But when tech stocks suffer heavy losses, investors clearly become more uneasy."
Beyond political factors, oil price fluctuations have also affected market sentiment.
Investors noted that the market's reaction to the midterm election results on Wednesday was delayed, partly due to a sharp drop in oil prices that day. At the time, Trump and Vance acknowledged that the war in Iran had weakened the Republicans' electoral prospects.
The decline in oil prices initially gave investors hope that inflationary pressures were easing, providing some support to the market. However, oil prices partially rebounded on Thursday, weakening this positive effect and creating more room for a new round of stock selling.
Leveraged trading positions are liquidated en masse, and algorithmic selling amplifies market declines.
While the investment logic behind the AI industry has come under scrutiny, the internal trading structure of the market has intensified this downturn.
According to Vanda Analytics, individual investors are on track to record the highest net stock sell-off in a single day since the start of the COVID-19 pandemic, late Thursday afternoon Eastern Time.
Ben Emons, founder and chief investment officer of FedWatch Advisors, said that algorithmic trading triggered mechanical selling, further amplifying the market decline.
He noted that earlier in the trading session, options traders rushed to close and hedge their positions, driving major stock indices sharply lower.
As investment losses continued to grow, systematic hedge funds also began selling off aggressively, further accelerating the market's downward trend.
Closing a bullish trade conducted with borrowed funds also increases market pressure.
Earlier this year, AI-driven rallies attracted many traders to amplify their returns using 3x leveraged ETFs and products tied to semiconductor indices. However, leverage is a double-edged sword: while it magnifies gains during market rallies, it also multiplies losses when prices turn downward, potentially forcing investors to liquidate positions quickly.
Direxion Daily Semiconductor Bull 3X ETF is a prime example. This fund aims to achieve 300% of the daily price movement of the NYSE Semiconductor Index, and it plunged 39% on Thursday alone.
Mike Bell, Head of Market Strategy at RBC BlueBay Asset Management, noted: "When market momentum turns against investors—especially in leveraged trading scenarios—it can trigger sell-offs that appear extremely severe. Sometimes, markets fall because people are selling; other times, people sell because the market is falling."
The sell-off on Thursday is no longer confined to a single segment of the AI supply chain, extending from chip manufacturers and data center developers to major tech companies. Overlapping factors—including policy uncertainty, corporate financing pressures, adjusted profit expectations, and leveraged trading liquidations—have stripped the U.S. stock market of its buffer, which previously relied on support from a handful of tech giants.
This $2.5 trillion market cap decline has forced Wall Street to reassess its investment expectations built on the continuous expansion of AI infrastructure.