Nasdaq drops 5% as chip stocks plunge on AI regulation fears post-midterms

US stock markets fell sharply on Thursday as semiconductor and AI-related stocks sold off, erasing gains from the previous day's post-election rally. The Nasdaq Composite declined 5%, the S&P 500 fell 3.3%, and the Dow Jones Industrial Average dropped 2.2%. The PHLX Semiconductor index plummeted 11%, with major chipmakers including Nvidia (down 7.7%), Micron, and Qualcomm leading the downturn. The selloff puts the Nasdaq on track to confirm a technical correction—a 10% decline from its October 6 record high.

Investors reassessed market implications following Democrats' midterm election victory on Tuesday. Concerns emerged that newly elected officials may seek to slow AI infrastructure development, particularly in data-center states that had driven earlier market gains. Market analyst Melissa Brown at SimCorp noted: "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."

Tech and discretionary stocks suffered broad losses. Meta Platforms fell 3.8%, while Amazon and Alphabet declined 1.7% and 1% respectively. Data-center operators, infrastructure providers, and AI-exposed utilities including CoreWeave, Applied Digital, GE Vernova, and Constellation Energy experienced steep declines. Tesla dropped 9% and SpaceX fell 11.4%. The market breadth deteriorated sharply, with declining issues outpacing advancers 5.38-to-1 on the Nasdaq.

Fed officials signaled potential future rate increases. Cleveland Federal Reserve President Beth Hammack and Richmond Fed Chief Thomas Barkin hinted at the possibility of rate hikes in comments made Thursday. Meanwhile, oil prices rose to around $97 per barrel for Brent crude amid uncertainty over Middle East conflict resolution, following Vice President JD Vance's comments suggesting the party should pursue a resolution to the war.

A Challenger, Gray & Christmas report showed October layoff plans fell to their lowest level since 2023 as companies focused on retaining employees. The market awaits Friday's US non-farm payrolls data, with traders currently expecting the Federal Reserve to raise rates next month following the September rate hike.