Tech stocks shed $2 trillion on AI regulation fears

The U.S. economy grew by 3.4% in the third quarter, a figure driven heavily by the artificial intelligence sector. On Thursday, investors began pricing in the political reality that followed the November 3 elections, leading to a sharp correction in tech valuations.

The Nasdaq Composite fell by more than 5%, erasing over $2 trillion in market value. The Dow Jones Industrial Average and the S&P 500 also posted significant declines. This sell-off marked a reversal from Wednesday, when shares had risen as relief spread over a decisive congressional outcome.

Voters rejected candidates who supported the current pace of AI data center construction, a sector critics argue consumes excessive water and energy. Many of these voters backed Democratic candidates who pledged to slow the proliferation of such projects. The incoming Democratic Congress is expected to scrutinize these facilities when it convenes in January.

David Busch, chief investment officer at Trajan Wealth, noted the market reaction. "There is some concern regarding AI regulation, and fears that there could be far more regulations coming to AI technology, as well as a pushback on the buildout of data centers across the country," he said.

Elon Musk's companies faced the heaviest losses among AI-linked stocks. Tesla and SpaceX shares dropped sharply. Musk spent hundreds of millions of dollars trying to elect more Republicans, and investors now anticipate increased Democratic oversight of his business ventures. The political shift extended to state governments as well. Gina Hinojosa won the Texas governor's race, a victory for a candidate who campaigned on slowing AI development.

The decline follows a year in which investors have questioned the return on massive AI investments. The sector remains a key driver of U.S. economic output. Average Americans hold substantial stakes in these companies through 401(k) plans and pension funds, exposing their retirement savings to the volatility of the tech market.