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The red wave arrived. Just not the kind anyone was hoping for.
A day after midterms delivered a blue wave that markets celebrated, things turned red. Very red.
All three major indices finished the day down big: the S&P 500 (-4.36%), the Dow Jones Industrial Average (-3.44%), and the Nasdaq Composite (-5.52%).
Some took it worse than others, like neocloud providers and Elon Musk's SpaceX and Tesla. But the sell-off was as broad as it was bad, with every sector finishing the day down.
By early this morning, the US premarket was offering a patchy reprieve: S&P futures were steady, Dow futures were down 1%, and Nasdaq futures were up 1.2%.
Historically, the six months after midterms have been a sweet spot for stocks, with the S&P 500 gaining an average of 14% since 1970. So what gives?
Dave Wagner, the head of equities and a portfolio manager at Aptus Capital Advisors, continued the ocean theme of the past few days when describing the situation to me.
"The tide went out a day after it came in," he said. "When the tide goes out, you find out who was at the most risk, and right now it's anything that needed Washington to stay friendly. Elections change the lifeguards. They don't change the ocean."
Data centers sit at the center of the turmoil.
Exit polls showed AI infrastructure was a key issue on voters' minds, leading them to back politicians who promised to clamp down on data centers. Now markets and the tech industry are trying to unpack what the incoming lawmakers mean for the AI buildout. Here's a roundup of what smart people are saying.
Joe Ciolli, author of our First Trade newsletter, is also a smart person. He unpacked the argument that a potential data-center slowdown is short-term pain for eventual long-term gain. It would allow the entire supply chain to catch up with demand, easing bottlenecks while reducing the risk of the industry overbuilding and flooding the market.
Brian Mulberry, chief market strategist at Zacks Investment Management, said Thursday's sell-off was the culmination of weeks of mounting concerns.
"There were some tough questions over the past couple of weeks (before the election) around the decline of free cash flow at the hyperscalers," he told me. "If these large capex plans do not yield returns sooner than later, then profitability could be under negative pressure for a long time. All those concerns got exacerbated today."
Big picture, Mulberry doesn't see a significant pullback in people's interest in growing AI capacity. He cited usage surpassing available compute and stable AI adoption rates as signs that demand isn't diminishing.
"We still need more compute. It's just a question of where it will come from and when it comes online," he said. "That uncertainty is the root of the volatility."
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