Tech stocks were headed for their worst decline since June on Thursday, with the semiconductor index (.SOX) briefly falling by double digits in the latest autumn reckoning for the AI sector. The SOX fell as much as 11%, its worst performance since March 2020, and the Nasdaq composite (.IXIC) dropped as much as 5%, a decline that would confirm a correction denoting a 10% pullback from its high last month. Advanced Micro (AMD.O), Sandisk (SNDK.O), Micron (MU.O), Dell (DELL.N) and Marvell Technology (MRVL.O) were among the more than a dozen large technology stocks down by double digits percentagewise.

It's the latest in a string of selloffs for the AI sector in what has been a bruising month since the Nasdaq's record close on October 6. Selling in stock and bond markets has reduced access to financing for many participants in the data-center buildout, while Tuesday's US elections brought the passage of dozens of nationwide ballot initiatives that stand to limit building in coming months and years. "AI stocks are already in a private bear market that virtually nobody is talking about.

If you look at the semiconductor index, it's down about 31% from its 52-week high. The point is that many AI-related stocks are already deep into bear market territory, and very few people are discussing it. "We're seeing large companies such as Apple cut back on AI spending because they are not seeing sufficient return on investment.

The hype around AI was enormous, but now the market is asking whether customers will continue paying for these products and services. "I'm not using AI as much as I was six or twelve months ago, and I'm definitely not spending as much on it. As that revenue starts to dry up, investors are asking what the next bullish catalyst is. Right now, there doesn't appear to be a clear answer. In short, we're seeing the unwinding of the AI trade, while big technology stocks are moving deeper into correction territory.

"Looking ahead, there's a strong possibility of a significant policy shift in Washington. Different policies could create new winners and losers across sectors." “It's really tempting to overinterpret or over extrapolate the first few hours of moves yesterday morning, but we already see that people continue to digest it, and they're all moving targets. Some of the narratives that seemed to be dominating yesterday reversed very quickly and we're still waiting for the dust to settle. It does look like there is this shift away from chipmaker stocks that is causing a bid for Treasuries.

“Everything is tied to AI right now. The biggest market moves in October were, relatively speaking, pretty small tweaks in AI sentiment. But that is the catalyst. That is what determines demand for credit, economic growth, so many different things and I think after the midterms, a big question is how the outcome affects the trajectory of AI investment and we've already seen that rotation out of chip stocks and into hyperscalers. I think that shows that there are expectations for slower investment, but that could increase the viability of the hyperscalers, which seem to be in the middle of a kind of frenzied race to the bottom or top, depending on how you look at it. “I don't think there's been a bigger impact on Treasuries because it could be that people are already pricing this in, not only a Democratic sweep, but also, you know, Greg Abbott, I think last year, the current governor of Texas, said that he used to be a huge advocate for data centers and he wanted Texas to be the capital of it all and he imposed a moratorium on new permits in September. And to me, that reflects how the political environment already signaled a backlash regardless. "This week's results kind of codify it or underscore what was already happening, which is that people don't want these things in their backyard.

Whether it's their understanding or misunderstanding of data centers’ impacts is beside the point. I think there's so much political pressure right now to slow down AI data centers and I think that is potentially the biggest driver of rates over the next couple of months.”“I think the sell-off first is unwarranted. And secondly, it's just the investors reorganizing their thoughts around the election results and how much policies will change to artificial intelligence and the associated technologies with that, such as the data center build outs. We've seen a lot of talk about delaying or moratoriums on certain states will not allow the data centers to be built. Investors are just trying to grapple with all that.”

“It's going to take a while before investors actually get a clear picture. The election was yesterday, and it certainly will take some time to sink in as a general message and what the direction will be. So, for instance, I can see this as having a minimal impact. Say the data centers are not allowed to be built in the majority states of the United States. Our due diligence and interviewing with people that work in the data center construction have said they don't care. They'll go to Canada or Brazil, for instance. Brazil is calling asking if they can host these data centers. So there are certainly clear workarounds. The general investor has the enlightenment yet about what the alternatives are and there will be plenty of workarounds.”"It is really is kind of a secondary reaction to yesterday's election results...

Yesterday's enthusiasm, in my view, was much less about who won or who lost, but the fact that we're now past that and we're looking through the windshield rather than the rearview mirror. "Today, there's been a revisitation of that enthusiasm. And basically the semiconductors and the data center stocks are under immense pressure and all their ecosystems around them, because there's going to be a lot of pushback.

"There's going to be a lot of pushback about those data centers being geographically located in someone's backyard, straining the power grid, straining the water systems. And so, although there are a number of data centers already approved, there are still a lot to be permitted. There's going to be a difficult road to get those permitted forthcoming.

So I think that's what today's sell off is about." MARK HACKETT, CHIEF MARKET STRATEGIST FOR NATIONWIDE, DOWNINGTOWN, PENNSYLVANIA: "What is being blamed is relatively weak earnings from Qualcomm and ARM Holdings. That was a reminder that the fundamentals still matter but also the election likely putting a governor on the speed of the AI build out, that is particularly impactful to the semiconductor space and the neo-cloud space - the kind of more speculative areas of the tech market.

"They're dragging pretty much everything else down. But the main driver here is very aggressive institutional selling and de-leveraging by hedge funds and more active institutional managers.

Today, this is an emotional sell-off." "Investors appear to be recognizing that some newly elected members of Congress and governors are looking to slow the pace of AI infrastructure development.

While it seems unlikely that they will be able to stop it altogether, any slowdown would raise concerns because the AI growth story has largely depended on the rapid buildout of supporting infrastructure. That could create uncertainty for many companies exposed to the sector, at least in the near to medium term." "What the market's focused on is that they priced in quite a bit of growth. And if that growth slows, then I think you have to switch from one investor base to a new investor base. The initial investor base was all about growth. They're going to move on somewhere else.

The new investor base is the one who has to say, all right, I want healthy cash flow companies. Those are two different investor bases. Anything related to AI is down more than anything not related to AI.

That handoff from growth investors to value investors may take some time because a lot of these stocks aren't exactly cheap yet. "Thematically, if AI is where growth has to be kind of moderated, that's probably where investors have to mark down their expectations and some may choose to exit entirely. "Yesterday was all about just we're all programmed to buy the dip.

And when people saw that stock futures were selling off overnight last night, there's just now always a knee-jerk reaction to buy any dip. And because it's rewarded time and again by the market going higher like it did yesterday. The question is are there more dip buyers or are there more longer term investors for whom the story is meaningfully changing?

And so yesterday, you can chalk one up to for the dip buyers, but today the long-term investors are the ones that are more meaningful." "What we see in technology today is basically the unwinding of the AI trade if you look at the broader picture.

Coming into this earnings season, there were worries that AI spending was too much. Those worries were already interfering with stronger-than-expected results from technology companies and strong results failed to improve appetite among tech investors. "We were already in a market mood that was not very appetising for technology due to the huge spending, higher borrowing costs and the fact that free cash flow levels at these hyperscalers are falling right now.

They are issuing more equity and more bonds in order to finance additional AI spending, and both more equity and more bonds are negative for valuations. We were coming into this week and into the midterms with this sentiment already in place, and then the midterms were basically the last nail in the coffin."

"There is now a chance that the two years of extra push from the Trump government for AI buildout will somehow be scaled back because there has been a lot about the AI trade that has been ignored by the current administration, whether we are talking about the impact on jobs, the economy or the environment.

We suspect there is going to be some scrutiny on this aggressive AI buildout. "The fact that hyperscalers rallied yesterday on the possibility of an AI slowdown was actually interesting, as investors thought that if companies cannot slow down, maybe the government will slow them down.

But these companies have spent so much money and put so much of their weight behind AI that a slowdown story may also come back and bite the hyperscalers. Many of these hyperscalers are also in the data-centre business, so they are very much tied to AI adoption and the fact that AI adoption accelerates. "Looking at the market right now, we see that political worries are mounting and they are only adding to the previous worries that we already had in the sector.

This is creating some panic and stress in the market right now, especially when you think that valuations were quite tight going into the earnings season. Strong earnings did not help and politics are not helping either. It is one more risk factor that comes and adds to the long list of things that could go wrong with the current pace of AI buildout."