Weekly Market Update: AI Selloff Overshadows the Post-Election Rally
Major indexes fell as a selloff in semiconductor and other AI-related stocks outweighed a broad rally the day after the midterm elections.
The S&P 500 fell -4.7% and the Nasdaq dropped -9.5%, while the Dow Jones slipped -1.6% and the Russell 2000 small-cap index declined -4.5%.
The Equal-Weight S&P 500 fell a more modest -1.4%, and Value outperformed Growth by a wide margin as Momentum and High Beta stocks dropped -16.2% and -13.5%, respectively. Overall, 7 of 11 sectors traded higher, led by Consumer Staples with a gain of 3.6%, while Tech sank -14.0%.
Treasuries rallied as the 10-year yield fell to its lowest level since September. Oil slid -11.1% on hopes of a diplomatic resolution in the Middle East, gold rebounded above $4,000, and the VIX, a measure of expected volatility, jumped above 25.
Key Takeaways
Midterms Deliver a Divided Government
Democrats won majorities in both the House and Senate, which means major legislation will need support from both parties during the final two years of President Trump’s term. Markets initially welcomed the outcome, with the S&P 500 gaining 1.6% on Wednesday as election uncertainty eased and investors anticipated fewer big policy changes.
Treasury yields declined, reflecting expectations of more constrained fiscal spending, although falling oil prices also contributed to the move. Policy uncertainty didn’t disappear, however. As discussed below, tech stocks weakened amid concerns about potentially tighter AI regulation.
Why it matters: Divided government (Congress and the Executive) makes sweeping legislative changes more difficult. Attention now turns to deadlines that need bipartisan agreement, such as the debt limit in 2027, while the White House can still act on trade through executive action.
Chip Stocks Lead an AI Selloff
The pressure started last Friday, when Intel fell about -29%, its worst day since 1974, after a weak outlook. The selling spread across chipmakers and continued this week, despite strong results from AMD, whose data-center revenue nearly doubled from a year ago.
Tuesday’s midterm elections, in which voters approved local ballot measures restricting data-center construction, weighed on the group as investors considered the prospect of tighter AI regulation and delays to planned projects. An index of semiconductor companies fell more than -12% on Thursday and closed at its lowest level since April.
Why it matters: The debate over AI has broadened from whether the spending will pay off to whether the buildout can continue at its planned pace. That’s a question strong earnings alone can’t settle.
Oil Slides on Hopes for a Hormuz Deal
Under a plan drafted with Qatari mediators, Iran said it could reopen the Strait of Hormuz within two days of a deal if the U.S. meets its conditions, including lifting sanctions. The U.S. hasn’t accepted the terms, but oil prices fell as traders priced in the probability of a negotiated settlement.
West Texas Intermediate crude fell -11.1% for the week, and Brent, the international benchmark, dropped below $100 after hitting a six-month high last Friday.
Why it matters: Lower oil prices ease one of the main sources of this year’s inflation pressure, and the decline helped pull Treasury yields lower.
Manufacturing and Hiring Hold Up
The ISM manufacturing index rose to 55.5 in October, above expectations and one of its strongest readings since 2022, while its prices index remained elevated at 75.2. A separate survey showed services activity slowed slightly but continued to grow.
In the labor market, employers added 86,000 jobs according to ADP, above the roughly 75,000 economists expected, and initial jobless claims fell to 189,000, matching their lowest level of the year. Abroad, the Bank of England raised its policy rate to 4.00%, its first increase since 2023.
Why it matters: The weakness in technology stocks hasn’t spilled into the broader economy so far, which helps explain why markets continue to price a 70% probability of a December rate hike.
