AI-related stocks came under pressure overnight as Democrats, seen as supportive of pausing data center construction, scored a sweeping victory in the US midterm elections.
Democrats secured a key win in the Texas governor's race, an important US technology hub.
Futures on the tech-heavy Nasdaq 100 fell 0.8%, more than double the decline in Dow Jones Industrial Average futures.
Data from the Robinhood trading platform showed the State Street Technology Select Sector SPDR ETF (XLK) dropped 2%.
Stocks more directly tied to AI infrastructure buildout suffered steeper losses.
CoreWeave, a higher-risk new cloud service provider that relies on debt to build data centers, fell 7% on Robinhood, while peer Nebius Group dropped 4%.
Elon Musk's Texas-based AI-related company SpaceX fell 6%, and Oracle dropped 4% on Robinhood.
The market had already expected Democrats to win control of the House and possibly take the Senate as well.
However, the Texas governor's office falling to Democrats appeared to be the biggest blow to tech stocks.
As signs emerged that Democratic candidate Gina Hinojosa was poised to win, related stocks were sold off overnight.
She is projected to defeat Republican Governor Greg Abbott, who was seeking re-election.
Earlier on Tuesday, as election results rolled in, Scott Ladner, chief investment officer at Horizon Investments, said: "The one thing that could really trigger a big market move is Abbott losing the Texas election. Because that raises a real question: where can these data centers actually still be built?"
Ladner added: "Texas was fertile ground for building data centers. If Abbott loses, I think that ground largely becomes barren. That will be a challenge."
Hinojosa has publicly supported pausing AI data center construction.
Wells Fargo data shows that 27% of planned US data center power capacity is located in Texas.
A "left-tail risk event"
The Democratic win in the Texas governor's race further intensified pressure on the AI investment boom that had previously led the bull market.
As the market grew increasingly concerned that data center spending growth by large hyperscale cloud providers, as well as AI giants such as OpenAI and Anthropic, is slowing, the Nasdaq 100 closed at the end of October in a technical correction range.
Ohsung Kwon, chief equity strategist at Wells Fargo, warned this week in a report: "We believe the stock market's reaction to the midterm election results depends to a large extent on the outcome of the Texas governor's race. A Democratic victory could become a left-tail risk event for the AI investment trade."
Democrats are also expected to win or hold governor's offices in several other important data center construction states, including Georgia, Pennsylvania and Ohio.
Wells Fargo estimates that Georgia accounts for 7% of all planned US data center power capacity, while Ohio and Pennsylvania each account for 5%.
Michael Hartnett, a well-known investment strategist at Bank of America, warned earlier this year that if Democrats won both Senate control and the Texas governor's office, it could lead to a "significant decline" of more than 10% in US stocks before the end of the year.
The Washington policy team at policy advisory firm Optimal Advisory wrote this week: "In 2024 and 2025, data centers were still a popular economic development tool, but by the time the midterm election campaign heated up, they had already become something of a target."
The team said: "The midterm elections are likely to send a signal to local and state officials: blocking, delaying, or raising the cost of data center construction may all bring political benefits."
Comments