$5.7 trillion "vanished"! A "priced-in" midterm election has triggered a "tech stock disaster."
The long-standing concerns about the AI bubble suddenly exploded in the face of an election result.
The Democratic Party's overwhelming victory in the U.S. midterm elections should have been a signal for "risk clearance"—the stock market initially reacted that way. But within 24 hours, Wall Street completed a dramatic turnaround from celebration to panic. On Thursday, the Nasdaq 100 index recorded its largest single-day drop since March 2020, evaporating $2.3 trillion in market value in one day; since the peak on October 6, the cumulative market value loss in the U.S. stock market has reached $5.7 trillion. The VIX fear index soared from 16.6 points to nearly 28 points, marking one of the most extreme volatility events starting from the calmest point in history.
The trigger was the market's repricing of the Democratic Party's policy stance—especially the latter's deep questioning of the large-scale expansion of AI data centers. This political variable, combined with the already highly crowded AI trading positions, created a rare scenario where retail investors, hedge funds, and quantitative strategies all rushed to sell simultaneously. The destructive power of this sell-off was astonishing because it left almost no time for anyone to react, from retail investors fleeing first, to hedge funds following suit, and then to quantitative strategies mechanically closing positions—all completed within a few hours.
Election Night: From Celebration to Confusion
On Tuesday night, the Democratic Party's overwhelming advantage exceeded expectations. According to The Wall Street Journal, Ben Emons, head of an investment research firm, sat in his Manhattan office, and the phone rang almost nonstop from 9 PM to midnight. He answered client calls while doing push-ups at his desk to stay alert. "People were caught off guard," he said, "This is a real shock event."
At that time, stock index futures dipped during the initial vote counting, but as the Democratic Party's advantage became clear and Trump publicly accepted the election results, futures quickly turned positive. George Mateyo, Chief Investment Officer at Key Private Bank, watched the live broadcast at home while texting colleagues, and his judgment was that the risk of intense disputes after the election had dissipated, which the market should welcome.
This judgment was confirmed on Wednesday morning. Sectors like construction and retail surged, with the Dow recording its best single-day performance since April. Wall Street briefly breathed a sigh of relief—thinking that the uncertainty of the election had been resolved.
However, this rebound was soon proven to be a false breakout.
Retail Investors Flee First, Panic Spreads on Social Media
The sell-off on Thursday was first ignited by retail investors.
In the first half hour after the market opened, the Nasdaq index plummeted, with net selling by individual investors reaching a historic record. According to data from Vanda Research, the net selling by retail investors on Thursday was second only to two trading days during the COVID-19 shock in March 2020. The market intelligence department at JPMorgan noted that retail selling was more than three standard deviations away from normal levels.
"I started working at 7 AM," said Raphael Monges, a graduate student in the engineering department at Columbia University and a member of the Columbia Options and Futures Trading Club. "I saw the market open, and the Nasdaq was dropping fast, then the S&P. The Nasdaq was crazy; all AI stocks were crashing. My phone started vibrating non-stop; everyone was watching the stocks, and everything was red."
Kevin Xu, an investor and content creator from San Francisco, glanced at the market at 10:30 AM on Thursday and was stunned. The Nasdaq had already dropped 4%, and his retirement account evaporated six figures overnight. "There was nothing I could do," he said, "I could only watch." In his social media feed, other retail investors were posting memes, venting their emotions in all caps, and some even shared mental health hotline numbers.
Joel Rieger, a 50-year-old retail trader from California, did not adjust his positions during this turmoil. "Yesterday's portfolio took a heavy hit; everything was red," he said, "It will be painful in the short term."
Hedge Funds Follow Suit, Institutional Selling with No Buyers
The retail exodus was just the beginning. As the market direction became clear, hedge funds and long-term asset managers joined the selling spree, while there were almost no buyers on the other side.
According to Bloomberg, "Institutional investors have exited, while retail and systematic strategies are aggressively selling," wrote Viraj Patel, a global macro strategist at Vanda, in a report. "This flow of funds is extremely rare outside of true market stress periods."
Ron Adler, co-head of global equity high-touch trading at JPMorgan, witnessed the entire process at the cash trading desk—the trading volume that day surged by 50% compared to normal. "What we saw was portfolio pain and indiscriminate selling," he wrote in a report to clients, "The frankness of today's fund flows is reasonable in direction, but the scale is staggering."
According to estimates from Goldman Sachs' prime brokerage, fundamental long-short hedge funds lost 1.3% in a single day on Thursday, which is a two standard deviation event; tech-themed funds fell more than 4%, with year-to-date returns nearly wiped out. Momentum strategies suffered a loss of 3.7 standard deviations. Morgan Stanley data showed that the total leverage of hedge funds has decreased the most since June's peak in over a decade.
Quantitative Liquidation Relay, Systematic Selling Pressure Self-Reinforcing
As the market's downward trend solidified, a series of quantitative trading mechanisms were triggered, pushing the selling pressure to a new level.
Charlie McElligott, Managing Director of Cross Asset Strategy at Nomura Securities, estimated that during Thursday's trading, options traders had a negative gamma exposure of about $7 billion for every 1% market volatility—meaning that for every 1% drop in the stock market, traders had to sell an additional $7 billion in stocks to hedge their risks. Meanwhile, volatility control funds needed to sell about $61 billion in stocks, of which $25 billion came from positions that were not closed on Wednesday; leveraged ETFs' end-of-day rebalancing would contribute about $47 billion in selling.
Trend-following quantitative funds (CTAs) were also retreating simultaneously. According to Vanda's estimates, CTAs sold about $13 billion in S&P 500 and Nasdaq futures, reducing their positions to near historical lows.
Barclays estimated that volatility control funds reduced their stock exposure by 30 percentage points in a single day, marking the largest single-day drop since the COVID-19 shock in February 2020. "Conversations with clients tell me that their motivation to further reduce this risk has increased at this point," McElligott wrote, "The theme of feedback is: preserve whatever little gains are left year-to-date and survive into next year's new capital and risk cycle."
By 3 PM, the Nasdaq had dropped 4.5%, and some traders were still hoping for a rebound in the last hour. Instead, the sell-off intensified, and the S&P 500 index closed near its daily low, recording its largest single-day drop since April of last year.
AI Sector Faces Liquidation, Damage Concentrated and Severe
The destructive power of this sell-off was highly concentrated in the AI-related sectors.
Sub-sectors such as storage chips, optical networks, data centers, and AI semiconductors saw single-day declines of 12% to 15%, representing extreme volatility of five to six standard deviations. About a dozen AI stock baskets recorded their worst single-day performance since the release of ChatGPT in November 2022. Among them, the storage and optical communication baskets, which suffered the most, have been cut in half from their June peak, with declines exceeding any pullback in the past four years.
As of Thursday's close, 57% of the Nasdaq 100 index constituents had fallen more than 20% from their highs, a percentage even higher than when the index itself entered a bear market in March 2022.
The dramatic nature of this crash is partly due to its sudden explosion from calm. The VIX was only 16.6 points at the market open on Thursday, below the one-year average; by the close, it was nearing 28 points. Since 1980, there have only been 48 instances where the S&P 500 fell more than 2% the day after rising 1.5%, almost all occurring during bear markets or crises.
Political Shock Combined with Old Concerns, AI Narrative Faces Repricing
The market's violent reaction reflects deep anxiety among investors regarding the logic of AI investments.
Before the election, the market already had doubts about the sustainability of AI trading: the capital expenditures of tech giants continued to swell, cash reserves shrank, and debt piled up on the balance sheets of data center operators. The Democratic Party's victory added a new layer of political risk—strong resistance from the Democratic Party to the expansion of data centers, especially in states like Texas, Ohio, and Georgia, which have become key battlegrounds for data center construction, casting a shadow over the prospects for AI infrastructure development.
Bank of America analyst Michael Hartnett pointed out that among surveyed voters, as many as 76% opposed the construction of new data centers near their communities, which is becoming a severe obstacle to the expansion of AI infrastructure.
Matt Rowe, a senior portfolio manager at Man Group, stated that the election results provided "quantifiable evidence that the public has a real aversion to data center construction," which "begins to change my judgment about the probability of these projects being realized." "Under all else being equal, these projects will take longer to advance and will cost more."
Joe Gubler, a portfolio manager at Causeway Capital Management, noted, "There will always be losers; not everyone betting on capital expenditures will be a winner."
On the other hand, investors who exited early avoided this storm. Jeff Muhlenkamp had almost completely cleared his fund of AI holdings before the crash, and his $275 million portfolio has remained flat since November, outperforming the S&P 500 for the year. "We sold the expensive and popular, and bought the cheap and forgotten," he said, "When momentum turned, we benefited."
The Market Seeks a Way Out
As AI trading faced liquidation, investors were searching for new safe havens—but the road was not smooth.
Even before the election, funds had begun to rotate into defensive sectors with lower valuations, such as utilities and consumer staples. In October, growth stocks lagged behind value stocks by 10 percentage points, marking the largest monthly gap since 2001. However, Thursday's plunge indicated that these new favorite sectors also failed to withstand the shockwave from the tech stock crash.
Some investors positioned themselves in advance, allowing them to exit unscathed. Fund manager Jeff Muhlenkamp had already cleared almost all AI holdings before the crash, and his $275 million portfolio has remained flat in November, outperforming the S&P 500 year-to-date. "We sold the expensive, popular ones, and bought the cheap, forgotten ones," he said, "When momentum turned, we benefited."
On Friday, chip stocks rebounded first, with the Nasdaq 100 index briefly rising over 2.6%, but all major indices still ended the week lower, with the S&P 500 posting a weekly decline of 2.68%. Sinisa Sorgic, a senior trader at Bright Trading, shorted TSMC's U.S. stock that day but was "burned" as it rebounded over 7.8% during the session. He summarized his feelings for the week: "Yesterday was a bloodbath. The market is too crazy now; I don't dare to go all in to buy the dip."
Market divergences have already emerged. Mateyo from Key Private Bank believes that state regulations will delay but not prevent the construction of data centers, and public concerns about AI may gradually fade as actual usage becomes widespread. Casaletto from Wellington Management, on the other hand, takes a cautious stance, believing that the trend of slowing AI expansion has already been established.
Whether this storm is a severe shake-up in the middle of the AI bull market or the beginning of a deeper cyclical transition remains undecided on Wall Street. But one reality has become clear: when political winds and crowded positions shift simultaneously, the buffer the market can provide is far thinner than imagined.