Wall Street’s response to the midterm elections lasted barely a full trading session before the AI trade cracked. A day after Democrats completed a sweep of Congress and sent equities sharply higher, investors turned on the same technology shares that had powered the market’s biggest gains, producing one of the year’s most violent reversals.
A celebration, then a stampede for the exits
The turnabout began with an outburst of buying. On Wednesday, the Dow Jones Industrial Average climbed more than 1,500 points, a gain of roughly 3% that ranked as its strongest session in months. The S&P 500 added about 1.6%, and the Nasdaq Composite rose 1.4%. Oil prices fell sharply, easing inflation worries, and the CBOE Volatility Index dropped as election uncertainty lifted. According to Steve Sosnick, chief strategist at Interactive Brokers, that decline in volatility may have prompted volatility-sensitive strategies to buy stocks, feeding the advance.
By Thursday, the mood had flipped. The Dow shed more than 1,800 points, erasing the prior day’s advance. The S&P 500 fell 4.4%, and the Nasdaq Composite dropped 5.5%, sliding into correction territory. The VIX jumped by as much as 70% during the session, a magnitude matched only eight times since 1991, according to CBOE data. Keith Lerner, chief markets strategist at Truist, characterized the selling to clients as a buyers’ strike in technology shares, while Nomura strategist Charlie McElligott described the unwinding of the year’s most crowded bets as investors shooting the generals.
Why the AI trade cracked
The election outcome itself did not change between Wednesday and Thursday. What shifted was investors’ appetite for risk in a market already questioning the durability of the artificial intelligence investment boom. For more than a month, hedge funds had been selling AI-linked stocks to lock in year-end profits. Shares of chipmaking equipment makers Lam Research and Applied Materials had each lost roughly a third of their value in the prior month, a sign that strain was building beneath the surface rally.
The blue sweep added a new and specific concern. Newly elected governors in several states have promised to halt or pause data center construction, and those states account for an estimated 45% of planned U.S. data center capacity, according to Goldman Sachs. Texas, where more than half of the country’s planned data center capacity is slated for construction, drew particular attention. Democrat Gina Hinojosa won the governor’s race there after pledging a moratorium on new data center approvals. Elon Musk, the prominent business figure, posted on X early Wednesday that data centers in space looked appealing under the circumstances.
Volatility returns to a jittery market
The whipsaw extended a year of wild swings. The VIX reached its highest level since late March, when President Trump extended the deadline tied to the Iran war. As election results came in, Sosnick was monitoring stock futures across CNN, Fox, MSNBC and Bloomberg; futures were still down about 1% when he went to bed, even as the broader market would rally the next morning.
By Friday’s close, the S&P 500 had posted its worst weekly performance since June. The episode left a straightforward lesson about market psychology: removing one source of uncertainty can expose another, and in a market already uneasy about AI spending, a single policy signal was enough to turn a blue-wave celebration into a technology rout.
