The Wild Week That Brought AI Investors to the Brink -- WSJ

By Hannah Erin Lang, Sam Goldfarb and Gunjan Banerji

Ben Emons can pinpoint almost exactly when the first wave of the midterm elections crashed over Wall Street.

Emons, whose firm provides investment research, was sitting at his downtown Manhattan office at 9 p.m. on Tuesday when his Android phone started ringing. It didn't stop until midnight. He tried to stay awake between calls by doing push-ups on the floor next to his desk. Some clients couldn't believe what was unfolding -- or fathom what the Democrats' landslide might mean for the market, he said. "People were caught off guard," Emons said. "This is a real shock event."

"I cannot see this working," one of them sighed. "At all."

Markets often react, and sometimes overreact, to surprises. But Tuesday's election sent Wall Street into a tizzy of historic proportions; stocks rocked violently in the three days that followed, as the Democrats' victories supercharged anxieties over an artificial-intelligence trade that had been building for weeks.

The reckoning came on Thursday, when AI darlings Nvidia and Micron Technology helped lead the Nasdaq composite into correction territory. Hedge funds dumped positions. The Cboe Volatility Index or VIX, known as Wall Street's "fear gauge," jumped to its highest level since March.

For weeks, investors had fretted over the piles of debt on data-center operators' balance sheets, the shrinking cash reserves at tech giants such as Alphabet, and the sneaking suspicion that the AI ecosystem's peak profits were already in the past. Few, though, expected Democrats to win gubernatorial races in states like Texas, Ohio and Georgia that have emerged as key battlegrounds over future data-center projects.

The week was marked by haywire trading: Markets reacted positively to the election news at first, sending blue-chip stocks to their best day in months.

The relief was short-lived. Wednesday's rally gave way to a punishing Thursday selloff that erased $2.5 trillion in market value from the Nasdaq composite and dragged major indexes to their biggest one-day drop since the "Liberation Day" drop in April 2025.

Now investors are left to grapple with the question of whether this is another stretch of choppy trading or the early unwinding of the stock market's all-consuming, massive bet on the technological revolution.

"A slowing of growth for AI stocks seems inevitable," said Timothy Casaletto, an equity portfolio manager at Wellington Management. "The speed of the build-out is more likely than not to be slower than the market previously anticipated."

Heading into Tuesday night, most Americans had far-bigger concerns than the fate of a data-center development in rural Texas.

As the evening's first results trickled in, stock-index futures initially slipped. They reversed after the decisiveness of the victories became clear and President Trump gave interviews saying he accepted the election results.

George Mateyo, chief investment officer at Key Private Bank, was watching the results at home, texting with work colleagues, when he read the news about Trump's remarks. They mattered, Mateyo thought.

"The notion that we would see a real contested, nasty, contentious type of period of time, that risk had gone down," he said. "I felt positive about that."

Wall Street's good mood extended through Wednesday. Shares of "real-economy" companies like home builders and major retailers surged. The Dow industrials logged their best day since April -- and for a moment, it looked like traders were mostly relieved that the election was over.

Wednesday's rally proved something of a headfake.

When Kevin Xu, an investor and content creator, glanced at the stock market prices at about 10:30 a.m. ET Thursday, he did a double-take. His first thought: "I hope this is a mistake."

The San Francisco-based content creator was staring at a 4% drop in the Nasdaq that had erased a six-figure sum from his retirement portfolio practically overnight. Across his social-media feeds, other individual investors were in various states of denial. Or duress. Some posted memes and all-caps rants. One posted the phone number for a mental-health hotline.

"There's nothing to do," he said of the drop. "You just watch."

There was no midday relief. The waves of selling in the U.S. stock market accelerated as the day wore on. Traders were getting jumpy; Wall Street's "fear gauge" VIX spiked.

Systematic trades helped amplify the losses. That jump in the VIX potentially triggered a group of funds known as volatility-control funds, which tend to make buying and selling decisions based on the level of turbulence in markets, to start dumping stocks. They added to an avalanche of selling, joining hedge-fund firms, rookie investors and other money managers.

Barclays estimates that volatility-control funds slashed their exposure to the stock market by 30 percentage points, the biggest one-day decline since February 2020, when the Covid-19 pandemic jolted markets.

By 3 p.m., with the tech-heavy Nasdaq down around 4.5%, some traders were peering at their screens and wondering if things would turn around, as they sometimes have in the final hour before the closing bell. Instead, the selloff worsened.

Some newfangled trades may have exacerbated the moves. Traders pointed to the billions of dollars sitting in leveraged exchange-traded products, which turbocharge exposure to the stock market. Assets in these funds have been at highs this year, and their rebalancing activity around the market close can fuel more volatility.

Several traders said Thursday's selloff was a classic example of a crowded trade unraveling, and the moves were driven by positioning across markets.

The market was "puking anything related to AI," Wellington's Casaletto said.

Instead of the YOLO bets that would pay out if AI and chip stocks kept surging, traders piled into bets that would profit from a market crash. Total options volumes hit the highest level on record in data going back to the 1970s.

Cem Karsan, a volatility manager and founder of Kai Wealth, said he has purchased complex derivatives -- including those tied to the VIX, options tied to the S&P 500 and credit-default swaps in the bond market -- that would pay out if volatility surged. He is bracing for more market tumult in coming months.

"This is an incredibly dangerous couple of days for the market," Karsan said.

Tech stocks staged a partial recovery on Friday, though all major U.S. indexes still ended the week in the red.

One key question is whether the momentum behind the AI trade will shift into a lower gear moving forward. The buy-it-all investing boom that characterized the early years of the bull market for tech stocks is petering out, analysts said. And a new phase is under way.

"This is what happens: we shift into a more sustainable velocity for the economy and for earnings," said Dan Farley, the chief investment officer for U.S. Bank Asset Management Group. "But there's turbulence when you shift from one speed to another."

Key Private Bank's Mateyo said his team has started to think about looking for buying opportunities, seeing the election as more of "a rebuke of the current political status quo" than it was a "rebuke of the economic and financial status quo."

State-level rules will likely slow -- but not stop -- data-center construction, he added. The public might have some qualms about AI, but over time, people will continue to "use it, incorporate it into their work, into their lives, and some of that cynicism or skepticism might fade over time."

Some investors aren't so sure Americans will learn to love data centers as neighbors.

"What we got out of the election was quantifiable evidence that there is real disdain for the data-center build-out," said Matt Rowe, senior portfolio manager at Man Group. Americans voted so overwhelmingly against data centers in local ballot measures that it "started to change my mindset around the probability of these projects getting executed," he said.

"All else equal, these projects are going to take longer to get executed, and they're going to cost more to do."

(END) Dow Jones Newswires

November 06, 2026 18:29 ET (23:29 GMT)