Stock market in turmoil after midterms: Tech stocks crash: Is an AI bubble about to burst?

Just two days after the midterm elections, tech stocks in the USA are collapsing, followed by stock markets worldwide. The recovery rally after the midterms is short-lived. Why are tech stocks on the decline now?

The political change in the USA has triggered a slide in prices on the financial markets. Photo: Yuki Iwamura/AP/dpa

Frankfurt/Main. Euphoria is followed by panic: Fear of more regulation of artificial intelligence (AI) has led to a sell-off in tech stocks on Wall Street. Two days after the Democrats' success in the US congressional elections, which initially caused the stock markets to rise, stocks in the chip industry, which are considered the biggest beneficiaries of the AI ​​hype, collapsed.

On Thursday, the Nasdaq 100 tech index suffered its biggest daily loss since the Corona crash in 2020, falling to April levels and losing around $2.3 trillion (2.06 trillion euros) in market value. The selloff affected stock markets worldwide, including the German stock market, which fell further on Friday. Was that the end of the AI ​​boom? And do private investors have to worry about their savings?

Why are tech stocks under so much pressure?

Financial markets are nervous after the US Democrats' landslide victory in the congressional elections. The Democrats are more skeptical about the chances of AI than the Republicans, who traditionally support the dismantling of government regulations. Tech companies have to prepare for more headwinds with their huge data centers for AI.

Already during the election campaign, resistance to the construction of more and more new data centers for the AI ​​boom emerged. Even Republicans imposed moratoriums on construction. Data centers have been criticized because of their immense electricity requirements, which could also drive up energy prices for the population. There are also concerns about noise, air pollution and a lack of water, as well as the fear that data centers will create few permanent jobs.

What would stricter regulation mean for the AI ​​boom?

Data centers are an essential part of the AI ​​infrastructure and consist of numerous standardized metal frames containing semiconductors. If investments in data centers were slowed down or even decreased, this would have significant consequences for chip manufacturers.

As a result, such companies on Wall Street were hit particularly hard. Nvidia shares fell 9.3 percent on Thursday; Large stocks from the storage sector such as Seagate, Western Digital and Sandisk even fell by up to 22 percent. Their products are essential for data centers. Micron shares lost 17.5 percent. The fear of stricter regulation also hit the corporate empire of tech billionaire Elon Mus: Tesla shares fell by almost 11 percent and those of the space and AI company SpaceX by 9 percent.

Are German stocks also affected?

German stocks that had previously benefited greatly from the AI ​​boom were also affected: stocks from chip manufacturer Infineon, for example, fell by more than 8 percent. Other German DAX stocks that benefited greatly from AI euphoria also suffered, including Siemens Energy and the construction group Hochtief. They recovered somewhat on Friday morning.

Is the AI ​​bubble now bursting?

There have been concerns for a long time that the gigantic billion-dollar investments by US tech companies will not be reflected in profits as quickly as hoped. The fear that an AI bubble will burst has been circulating on the stock market for more than a year - but prices still rose. In addition, the shares of the “Magnificent Seven” - including Apple, Microsoft, Nvidia and Alphabet - have great weight on the world stock exchanges. The boom in tech stocks has long been the main reason for the upswing on the stock markets despite all the wars and crises.

“Exactly what investors have been fearing for months has happened on Wall Street: that the cluster risk from a few tech heavyweights will take revenge and drag the major indices down if they fall more sharply,” commented market analyst Jochen Stanzl from Consorsbank.

Is the success of AI companies fundamentally in question?

Industry experts and economists overwhelmingly deny this. The current crisis on the stock markets is not seen as a failure of the technology itself, but as a painful adjustment of exaggerated market fantasies. The fundamental benefits of AI in automation, data analysis, medical research and software development remain undisputed, and the demand in companies for practical applications continues to grow.

What is more at issue is the timetable in which the gigantic investments in hardware and data centers have to be amortized. While the stock market prices had recently priced in almost flawless, exponential profit growth, the reality of infrastructural bottlenecks and political hurdles is now catching up with companies. The business model does not fundamentally falter, but the phase of slight growth and investors' blind trust in every AI report is giving way to a phase of sober cost-benefit calculations.

Is my ETF portfolio at risk?

For private investors, the price slide is particularly noticeable because common world indices such as the MSCI World have become heavily technology-heavy in recent years. Due to the enormous market capitalization of Apple, Nvidia, Microsoft and Co., the top tech stocks often made up more than 20 to 25 percent of a standard global stock ETF. Many private investors are seeing the consequences of the tech collapse directly in their portfolio.

According to consumer advocates and asset managers, anyone who has been saving widely for retirement provision over many years should still remain calm. Corrections of 10 to 20 percent are part of the normal fluctuation range on the stock markets, and in ongoing savings plans, the setback even makes it possible to temporarily buy cheaper shares.

However, anyone who has specifically invested in sector ETFs from the semiconductor or AI sectors must be prepared for persistently high price fluctuations and should check whether their own portfolio is sufficiently balanced by other sectors such as industry, consumer goods or health

So what about the year-end rally on the stock market?

Hopes for a carefree year-end rally have been severely dampened by the tech shock. After the Dax initially reached a record high with hopes of a more lenient course from the US government, the leading German index turned negative. “Election euphoria is followed by disillusionment,” said Salah-Eddine Bouhmidi from broker IG. Although the months of November and December are historically considered to be seasonally strong on the financial markets, rapid all-clear signals would be needed for a noticeable recovery at the turn of the year.

In order for prices to rise again, market observers believe that reassuring tones from US politicians regarding future regulatory plans or surprisingly robust economic and quarterly data would be necessary. However, if political uncertainty remains high and major investors hold back on making new investments, the traditional year-end rally could fall apart and give way to a phase of increased nervousness - especially since there are enough other concerns with the Middle East conflict, inflation and high interest rates.