The stock-market rout, which began soon after the opening bell on the New York Stock Exchange on Thursday, worsened as the day progressed, and by the end of the day trillions of dollars were wiped out of the market value. While tech stocks suffered the most damage but was not limited to it but extended to defensive fallbacks like Walmart Inc.
While concerns over artificial intelligence (AI) valuations and the future of data-centre investments initially put pressure on chipmakers and technology companies, Thursday’s rout extended well beyond Big Tech. A basket of the most-shorted US stocks fell nearly 8%, unprofitable technology companies declined 7.7%, and the Russell 2000 index of smaller companies dropped 4.5%, pushing it into correction territory.
The widening sell-off reflects growing investor caution, with hedge funds reducing exposure to crowded trades, momentum strategies suffering sharp losses and large investors reluctant to step in and buy stocks during the decline.
The Nasdaq 100 plunged more than 6% on Thursday, its worst single-day fall since March 2020, while the S&P 500 declined 4.4%. The Philadelphia Semiconductor Index, which tracks major chipmakers, dropped 12%, also marking its worst session since March 2020, Bloomberg reported.
US midterm results add to Wall Street’s concerns
Democrats’ sweeping victories in the US midterm elections have added a political dimension to concerns that were already weighing on technology stocks.
Democratic candidates campaigned on slowing the expansion of data centres and strengthening oversight of the AI industry. They secured control of both the House of Representatives and the Senate, raising questions about the regulatory environment for companies investing heavily in AI infrastructure.
The election outcome also raised concerns about the pace of data-centre construction, particularly in states such as Texas, where Democratic governor-elect Gina Hinojosa had pledged a moratorium on new data-centre construction.
The prospect of tighter scrutiny of data-centre approvals, including their impact on the environment and electricity bills, could delay projects and increase costs across the industry, an analyst told the BBC.
However, the election results were not the only factor behind the market decline. Investors were already questioning the scale of AI-related capital expenditure, high technology valuations and whether the investments would generate adequate returns.
How the AI sell-off spread beyond Big Tech
The pressure on technology stocks quickly extended to other parts of the US market, including companies that are considered more vulnerable during periods of heightened risk aversion.
According to Bloomberg, a Goldman Sachs basket tracking the most-shorted companies fell nearly 8% on Thursday. A basket of unprofitable technology companies, including Roku and Peloton Interactive, declined 7.7%, marking its worst session since early June.
Companies with fragile balance sheets and higher debt burdens fell around 4%, their sharpest decline since April 2025, according to data compiled by Goldman Sachs and Bloomberg.
The Russell 2000 index, which tracks smaller US companies, dropped about 4.5%, pushing it into correction territory. Smaller businesses can be particularly exposed to higher interest costs because of their debt burdens.
The sell-off also hit investment strategies that had benefited from the market’s earlier rally. The iShares MSCI USA Momentum Factor ETF, which tracks stocks with strong price-performance trends, fell 8.2% on Thursday, its worst daily decline since 2020.
These declines suggest that investors were reducing exposure not just to AI companies but also to speculative stocks and other riskier investments.
Hedge funds’ forced selling adds to market pressure
The sharp reversal in market sentiment also exposed the risks associated with crowded investment positions and momentum-driven trading strategies.
Bloomberg reported that the rapid reversal also hurt momentum-based investment strategies, which had previously benefited from buying stocks that were performing well. As those stocks fell sharply, the strategy suffered one of its worst sessions in years.
Neil Wilson, investor strategist at Saxo UK, told Business Standard that fund managers were reducing their overall exposure to AI investments as the trade became more difficult. He also pointed to Morgan Stanley data showing that equity long/short hedge funds had experienced their biggest gross-flow drawdown since the investment bank began tracking the data in 2016.
The growing scrutiny of returns from AI investments, including concerns about negative cash flows at some hyperscalers due to heavy spending on AI equipment, has added to investor caution.
VIX surge signals growing investor anxiety
The market turmoil was also reflected in a sharp rise in volatility as investors sought protection against further declines.
The Cboe Volatility Index (VIX), which measures expected volatility in the S&P 500, surged 11.57 points to close at 28.18, its highest level since March, Bloomberg reported.
A gauge of expected volatility in VIX futures also recorded its biggest one-day point increase since 2018. Meanwhile, investors moved towards US Treasuries, traditionally considered a safe-haven asset during periods of market uncertainty.
The Russell 2000’s decline and the losses in speculative and highly indebted companies further demonstrated how the sell-off was affecting a wider range of assets.
For now, investors are now monitoring whether the market correction deepens and whether the decline spreads further across sectors.
