The Nasdaq suffered its biggest one-day drop in 19 months Thursday, heading for a fourth straight weekly loss and wiping nearly $3 trillion from the market value of S&P 500 companies, a correction analysts say is driven by fears that Democrats taking control of the U.S. Congress could lead to stricter regulation of artificial intelligence.
Shares bounced in premarket trading today, but that does not change the underlying story of news that could hardly have landed at a worse time for shares of big tech companies.
The Magnificent Seven posted mixed results this earnings season, with some of them falling more than 10% in a single session because of the market’s high bar. But Thursday’s correction is especially harsh for Anthropic, the company behind Claude, which had been planning an IPO for Nov. 16.
Analysts say Anthropic’s market debut would come amid a perfect storm, with Wall Street intensely focused on hyperscaler results and rumors that a Democratic majority in Congress would place legal limits on artificial intelligence development.
U.S. politics roils the market
Wall Street received the midterm results with caution, but not panic. In fact, the first reaction was not bad.
But Thursday was definitely a dark day.
President Donald Trump had said he would not object to artificial intelligence and offered a geopolitical explanation, arguing that rival powers, especially China, would not stop developing it.
The rumor stems first and foremost from Democrats’ past and present agenda, both during Joe Biden’s administration and in Congress.
That record includes Executive Order 14110, issued in October 2023, one of the broadest regulatory measures in the U.S., aimed at setting strict guidelines on AI safety, privacy and data protection, as well as the congressional commission led by that party that seeks a form of “governance” for the technology.
It remains to be seen whether the majority that will arrive in 2027 will actually push that legislative agenda and whether Trump will follow through on his promise to be a veto president.
How much Wall Street is willing to pay for AI
But behind the political debate lies a deeper question for Wall Street: how much investors are willing to pay for artificial intelligence growth, and how long they are willing to wait for that growth to turn into profits.
The move in tech stocks came after several months in which Wall Street had pushed company valuations to very demanding levels. The expectation was that massive spending on AI infrastructure would eventually translate into higher revenue and earnings.
But no one can yet say what happens if building that infrastructure takes longer, costs more or runs into political limits?
The concern is especially relevant because the AI business still requires huge investments. Nvidia, AMD, Broadcom and memory makers do not depend solely on demand for their products. Much of their outlook is tied to major tech companies continuing to build data centers at a very rapid pace.
That is the financial channel linking elections and the market. If a Democratic Congress pushes restrictions on data center construction, permits, energy consumption or certain AI applications, the problem for Wall Street would not be regulatory alone. It could affect the investment plans of the companies that currently underpin much of the boom.
For now, however, there is no approved legislation that would allow anyone to say that scenario will happen. What exists is a new hypothesis that the market has started to price in.
And the impact has already reached the primary market. Reuters reported that potential Anthropic investors are questioning whether the company can move ahead with its roadshow next week and sustain a valuation that had been discussed at around $1.5 trillion.
Some investors consider that figure to be at the high end of expectations and could demand a steeper discount to take part in the offering.
Anthropic has quarterly losses and major commitments to finance its expansion in infrastructure and computing power. In other words, the possible IPO has become a test of how much appetite the market still has for funding AI companies at extremely high valuations after Wall Street’s correction.
Friday’s reaction shows, however, that the market is not necessarily at a definitive turning point.