After a round of selling pressure combined with the election outcome, positioning has been flushed out, shorts need to cover, and the growth sector still shows resilience. In recent weeks, market sentiment toward the AI sector has clearly turned bearish.
The midterm election results will make some investors feel that the worst-case scenario for the sector has already landed. However, a Goldman Sachs strategist offers a different view.
AI-related names have already seen valuation pullbacks, short positions need to be unwound; the final election outcome could actually accelerate capital expenditure rather than suppress capital investment.
Rich Privorotsky, Goldman Sachs' head of European equity trading, sees the AI sector as having been "sold to the extreme." His message to fund managers is: fundamentals remain strong, election uncertainty has dissipated, and positioning is much cleaner.
Before Tuesday's vote, the question investors cared about most was: would a Democratic victory curb the data center expansion wave. The market paid particular attention to the Texas governor's race 鈥?roughly a quarter of all planned data center projects in the country are located in that state.
Incumbent Republican Governor Greg Abbott's defeat by Gina Hinojosa means the local regulatory environment may become stricter. But Privorotsky's logic is: corporate decision-makers may pull capital deployment forward to 2027, taking advantage of the current approval channels and completing strategic deals before planning and regulatory systems are adjusted.
By 2029, when a new president takes office, the tax system may change, and administrative regulation and merger review will both tighten. Major hyperscalers will choose to get things done quickly. He also raises another point: if future computing expansion is constrained, the value of existing, already-built and operational computing capacity will rise accordingly. In theory, this benefits hyperscalers like Amazon, Microsoft, and Alphabet that have already deployed large amounts of computing capacity.
In a trading note sent to clients on Wednesday, Privorotsky also acknowledged that delays or shelving of some data center projects will drag on what investors call the "picks and shovels" trade 鈥?that is, chip, cooling, power equipment manufacturers, and energy service providers.
But these sectors have already experienced pullbacks. For example, the Philadelphia Semiconductor Index ETF (SOX) has fallen 20% over the past month. The report uses AMD's strong third-quarter results as evidence that the current AI capital expenditure cycle still has resilience. AMD's fourth-quarter guidance is extremely strong, with quarter-over-quarter growth expected to rise another 27%.
Privorotsky believes that constrained supply-side expansion may not destroy demand, but instead keep high prices in place for longer. If data center construction is delayed, hyperscalers may see orders exceed demand. But Privorotsky believes this is already reflected in current low valuations.
For emerging cloud providers like Nebius and CoreWeave, the investment conclusion is more complicated and depends largely on whether computing capacity has already been signed under long-term contracts and whether the computing capacity has already been built.
Finally, Privorotsky believes that after the election is settled and uncertainty declines, high volatility represented by the VIX fear index will be difficult to sustain. If volatility falls rapidly as he predicts, and volatility is negatively correlated with stock indexes, then the broader market index is likely to move higher; AI and AI-related stocks account for nearly half the weight in these indexes.
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