Wall Street experienced a broad rally on Wednesday following significant Democratic victories in the midterm elections. However, this general market optimism masked a distinct fracture within the artificial intelligence sector. Investors were rapidly reassessing whether the new political landscape would slow down the massive construction of data centers across the United States.
The political shift presents specific challenges for the AI infrastructure boom. Democratic candidates who advocate for restrictions on data center development won governorships in Texas and Ohio. These states are critical hubs for sector investment, with Texas alone accounting for approximately 25% of current data center construction according to Bernstein analysts. Additionally, voters approved local ballot measures that impose limits on such projects in various communities nationwide, while Democrats secured control of both chambers of Congress.
This potential slowdown manifested in a notable split among AI stocks. Major cloud computing companies, which are spending heavily to expand their own data center footprints, saw their shares rise. Amazon stock increased by 7%, while Microsoft climbed more than 6%. Alphabet, the parent company of Google, also gained nearly 4%. Jim Cramer of CNBC referred to these firms as the incumbents, noting that they possess existing large-scale infrastructure and strong customer demand for their available computing power.
Cramer suggested that the market views a moderation in future spending from these giants as positive. He explained that this discipline could allow their cash flows to rebound. The market appears to believe that the election results will rein in the extraordinary expenses previously incurred by Amazon, Microsoft, Meta, and Alphabet. This perceived spending discipline is being treated as a favorable development, even if it is driven by political pressure.
In contrast, smaller upstart computing providers known as neoclouds faced steep declines. Companies such as CoreWeave, Iren, and Nebius are considered more speculative bets on the AI boom and generally hold weaker balance sheets than the larger incumbents. CoreWeave shares dropped almost 10%, Iren fell 11%, and Nebius slid about 6.5%. These losses compounded their drawdowns from year-to-date highs, reflecting investor anxiety over the increased reliance on debt to fund expansion.
Cramer argued that the midterms do not mark the end of the data center era, but they may make financing more difficult. He compared the situation to the challenges faced by natural gas pipelines during the administration of former President Joe Biden. He stated that neoclouds are the entities least likely to secure marginal capital in this new environment. This funding constraint could hinder their ability to continue aggressive expansion plans.
Suppliers of AI infrastructure equipment also saw their stock prices decline, as investors anticipated fewer orders due to a potential buildout slowdown. Eaton shares fell 9%, erasing the gains from its strong earnings report on Tuesday. GE Vernova dropped 10% despite reporting robust third-quarter results and a growing backlog of gas turbines designed to meet rising electricity demand driven by AI. Both companies entered the trading day significantly below their year-to-date peaks.
Semiconductor stocks also came under pressure. Marvell declined 8% and Arm fell 5%. Micron and Intel dropped 5.5% and 3% respectively, while Nvidia, the world's most valuable chipmaker, lost 1%. Qnity Electronics, a key supplier of chip manufacturing materials, was slightly lower despite reporting a beat-and-raise quarter earlier in the day. Cramer recommended buying Qnity, suggesting that the data center trade has not been entirely eliminated by the election results.
Apple shares jumped 6%, offering a different perspective on the AI impact. The company has faced margin pressure due to AI-driven spikes in DRAM memory costs, which forced it to raise prices on some products. Cramer suggested that if memory price increases begin to taper, Apple could see significant relief. He characterized investors who sold the stock due to margin concerns as being wrong in their assessment.
BMO Capital Markets analysts noted that while there are clear near-term winners and losers, existing backlogs and projects should still convert given the underlying demand growth. The overall market action suggests that the midterm results were not fully priced in by investors. While short-term swings are expected, the data center buildout will likely continue, albeit in a form that may differ from previous expectations.
