Talk about a delayed reaction. On Wednesday, stock market pundits’ read on the Democratic sweep of Congress was that “gridlock is good.” That included the presumed difficulty of getting legislation passed at the federal level, with commentary noting that any limitations would come at the state level. Then on Thursday, it seems investors noticed what happened at the state level.
Thursday’s AI stock bloodbath was hardest on semiconductor and hardware stocks, which had been seen as beneficiaries of the rush to build data centers to support AI technologies. Sandisk SNDK lost more than 22.0%, Micron Technology MU dropped 17.5%, and Western Digital WDC fell 17.4%. Nvidia NVDA fell more than 9%; before Friday’s rebound, it was on track for its first annual decline since 2022.
While these stocks bounced a bit on Friday, the election results introduced significant uncertainty to the AI buildout, the stock market’s most important engine of returns for the last three years. Against that backdrop, in this week’s Market Brief:
- T. Rowe’s Tim Murray talks about the market risks of a data center slowdown, and a potential sliver of good news for hyperscalers.
- Earnings are on deck this week from neocloud companies CoreWeave and Nebius, both at the center of the AI trade’s retreat.
- What Tuesday’s CPI could mean for a December Federal Reserve interest rate increase.
How Election Results Could Play Out For AI Stocks
Even before Tuesday’s elections, the AI trade, which has led the stock market’s rally since the spring of 2023, looked wobbly. Investors have been increasingly wary of the seemingly insatiable demand for capital to fund a buildout with highly uncertain returns on investment. In the bond markets, companies have been forced to pay high yields to raise AI-related debt, and in the case of CoreWeave CRWV, the value of its bonds has plummeted.
Tim Murray, capital markets strategist at T. Rowe Price, says there were already questions building about AI-driven earnings for 2028. 2027 orders and numbers are largely “baked into the cake,” but investors were beginning to eye a deceleration in 2028. “Now, on top of that, you’ve got this political constraint.”
Like most observers, Murray does not think it’s likely that data center construction will come to a halt. “It’s more like we’re going to have a flattening of the [data center growth] curve … and that’s going to lead to some downgrades in earnings” in the medium term. But further out, “it should lead to an upgrade in earnings in 2030 and 2031.” In the meantime, “everybody’s worried about how much crowding there has been in the AI trade, and how much of that needs to come out.”
In addition to the potential slowdown in data center construction, stricter oversight and requirements for power and water use could raise costs. “[Not only does] it take longer … the ROI could be lower than had been thought,” Murray says.
However, he says there could be a silver lining for the hyperscalers, such as Amazon AMZN and Microsoft MSFT, which are spending big on the buildout. “A slower, more gradual buildout is probably better for [hyperscalers],” as it lessens the pressure on their cash flows that investors have been worried about. “Also, if there is more scrutiny over AI, that kind of creates a situation where the current winners are more likely to remain the winners, and it makes it harder for competition to happen.”
But overall, Murray says a data center buildout slowdown presents a real challenge for some companies. “There are going to be companies that were counting on getting positive cash flow sooner than when it’s going to come, and there’s a question of how many of them are trying to thread the needle between financing and getting the revenue to pay for that financing.”
Critical Timing for CoreWeave Earnings
If there is a poster child for concerns about AI financing and the data center buildout, it’s neocloud company CoreWeave. The firm will report its quarterly earnings results after the close of trading on Tuesday. Fellow neocloud company Nebius NBIS will report Thursday morning. CoreWeave, which went public in 2025, has seen its stock plunge 35% in 2026, having been cut in half over the past month. Nebius stock is still up more than 40% this year, but it has also collapsed just shy of 50% in the last four weeks.
Morningstar analyst Luke Yang offered a preview of what to watch in CoreWeave’s earnings before the election-driven selloff. After the election, he says the company’s risk from a data center slowdown is indirect, but its financing pressures are significant.
On election results, CoreWeave is not as exposed because they don’t build data centers directly/deal with the local governments. I think the biggest concern is whether the contracted data center capacity can be delivered on time by their data center partners, which can affect their long-term growth. If the growth prospect sours, the market will discount its multiples and the stock will be down. If they can ramp up as planned, then the recent selloff is overdone. CoreWeave’s debt is under pressure again this month.
The financing risk is real. At 16% yield, they can’t really borrow money to ramp up capacity as planned. Maybe Nvidia or a [private equity firm] will step in to provide financing. We’ll need to hear more updates from management on that front during the earnings call Tuesday. I hope they give a more specific financing plan, as Oracle did at its investor day.
Luke Yang, Morningstar equity analyst
CPI and a December Fed Rate Hike
The week’s other big news was Friday’s October jobs report, which came in much hotter than expected, with an increase of 165,000 jobs. As Colin Laidley wrote, the strong report is seen as tilting the balance strongly in favor of the Fed raising the federal-funds rate by a quarter point at its December meeting to a target range of 4.00%-4.25%.
With Fed officials saying their focus is squarely on tamping down inflation, the October Consumer Price Index report is seen as a critical variable in whether the Fed pulls the trigger. Economists expect somewhat better news on inflation from Tuesday’s release, however. The CPI is seen rising 0.24% in October, down from a 0.60% jump in September, according to FactSet. Excluding food and energy, the CPI is forecast to rise 0.2%, down from 0.3% in September. (Due to the government shutdown in October 2025, there will be no year-over-year comparison.)
Manulife John Hancock Investments co-chief investment strategists Emily Roland and Matt Miskin wrote that the strong jobs report has potential implications beyond the December meeting, depending on inflation data in the coming months. “If we had to handicap the balance of risks for the Fed, at this stage we’d skew more hawkish. Another ‘hot’ inflation print or two, and we could easily see markets pricing in more, faster increases.”
