Midterms add to an AI correction already underway

The midterms added political and regulatory uncertainty to the AI outlook. That may fuel near-term volatility, but we do not believe it fundamentally changes the long-term investment case for AI.

US equities came under sharp pressure on Thursday as investors digested the implications of the midterm elections. While a Democratic sweep had become increasingly anticipated heading into Election Day, the breadth of the results brought the sector-specific implications of the new political landscape into sharper focus, particularly for the AI infrastructure buildout.

The Nasdaq Composite fell 5.5%, compared with a 4.4% decline for the S&P 500, while many semiconductor and data-center-related stocks experienced substantially larger losses.¹

While the election was not the sole cause of the AI correction, it added political and regulatory uncertainty that accelerated a repricing already underway.

AI correction predates the election

The midterm results intensified pressures that had already been building within the AI complex. The scale and financing of AI capital spending, elevated earnings expectations, and questions around monetization had raised the hurdle for further gains. Against that backdrop, investors had become less forgiving of challenges to the AI growth story.

Global semiconductors were already in a 20% drawdown before the midterm elections, while broad US equities had held up comparatively well. That suggests the correction began as a concentrated repricing of AI-related stocks, rather than reflecting a market-wide deterioration in US equities. Thursday’s selloff extended beyond the AI trade, but semiconductor and other AI-related stocks continued to experience the steepest declines.

Such downturns are not unprecedented. Semiconductor equities have experienced multiple meaningful corrections over the past five years, including considerably deeper drawdowns in 2022 and 2025 (Figure 1).

Midterms add a new source of friction

The election has nevertheless added another layer of uncertainty, bringing concerns around power demand, infrastructure, and the impact of data centers on local communities into sharper focus. Democratic gains, particularly in key state races, could increase scrutiny of AI providers and data-center development, creating additional friction around where and how quickly new capacity is built.

But we believe the market reaction overstates how much the election changes the longer-term trajectory of AI development. At the federal level, Democratic control of Congress alone would not likely be enough to curtail the buildout in the face of a presidential veto. AI remains a strategic priority for both parties.

The election may add to near-term volatility, but it’s unlikely to change the long-term AI investment case.

No reset of the AI thesis

Volatility may remain elevated as investors assess the regulatory risks facing AI and data-center development under the new political landscape. But periods of repricing can also help reset expectations after strong gains and create opportunities for longer-term investors. We remain constructive on US equities, with an emphasis on selectivity.

This environment also reinforces the importance of looking beyond the most crowded parts of the AI trade. As the investment cycle matures, the focus may shift beyond AI enablers to adopters positioned to benefit from deploying the technology.

For investors, that means looking across the AI value chain, with an emphasis on businesses positioned to translate structural demand into sustainable earnings and returns on capital.