The Unwinding of the AI Trade is Taking These Stocks Down with it the Most

Dow Jones
11/06

It looked like an artificial-intelligence trade slaughter Thursday with chip and data center-related stocks sinking as Wall Street feared the Democrat Party's big win in the midterm elections could mean heightened AI buildout regulation.

The Nasdaq Composite sank 4.4%. The S&P 500 dropped 3.3% and the Dow Jones Industrial Average was down 2.1% after rising 3% on Wednesday. The PHLX Semiconductor on Thursday was tumbling 9%.

It might seem like an overreaction but the midterm election results, which handed control of Congress to the Democrats along with several governorships, has had an immediate effect on the stock market.

It should come as little surprise that S&P 500 stocks with exposure to AI data centers have taken the brunt of the damage since voters handed Democrats the wheel.

Vertiv Holdings, Comfort Systems, Sandisk, and Flex are four of the five worst-performing stocks in the S&P 500 since the closing bell on Tuesday.

Vertiv has fallen 25%, while Comfort Systems and Sandisk each have declined 24%. Flex has dropped 23%. The fifth-worst stock is Fidelity National Information Services, down 24%, which tumbled after the financial-technology company lowered its full-year outlook and announced the departure of a top executive.

"Election results are having an impact on companies with heavy data center exposure," William Blair analysts Tim Mulrooney and Jed Dorsheimer said in a research note. The midterm elections resulted in 10 states with governors who support moratoriums on data centers. Those states have 40% of planned data-center capacity in gigawatts, according to William Blair.

Sandisk has been one of the poster children of the AI trade and so it should come as little surprise that its shares have been slumping.

Vertiv, which supplies data center cooling and power systems, is at particular risk. As is Comfort Systems, which has seen its share price boosted by data-center demand for its cooling and electrical infrastructure.

Flex, similarly, has received a significant boost from the data-center buildout. The electronics manufacturing services company recently acquired EPC Power, a provider of intelligent power conversion solutions for data center and grid applications.

"We expect near-term volatility in AI infrastructure companies over the next several weeks, given the higher win rate of pro-moratorium governors relative to prediction market expectations," said Mulrooney and Dorsheimer.

On the flip side, AppLovin has been the best-performing S&P 500 component since the closing bell on Tuesday, rising 46% since. But that has little to do with the election result and everything to do with the advertising tech platform company's strong quarterly earnings.

The attention on Wall Street is all about the unwinding of the AI trade. The question on investors' minds now is whether this is a one-off or just the beginning of prolonged pain.

 

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