Morning in New York: AI Stocks Enter a Period of Turbulence

A daily review and forecast of events in the U.S. stock market by Mikhail Denislamov, Deputy Director of Capital Markets Research at Freedom Broker.

The market capitalization of S&P 500 companies fell by approximately $3 trillion yesterday, as the index posted its worst session since April 2025. Selling pressure intensified amid concerns that a Democratic victory in the midterm elections would slow the construction of AI data centers and tighten regulation of the industry. The Nasdaq has entered a technical correction, falling more than 10% from its October high. At the same time, investors revised their expectations for the Fed’s interest rate: the market is now fully pricing in a rate hike only by March 2027, rather than December 2026.

The sell-off in the technology sector has reached extreme levels by some metrics. Over the past week, the SMH semiconductor ETF has already lost 20.3% and is now more than 21% below its 50-day moving average. This is the worst percentage decline in the past five years. Over the past five trading sessions, the SOX sector index has posted its steepest decline relative to the S&P 500 since 2002. In our view, this sets the stage for a short-term rebound in certain individual stocks. In any case, investors must now proceed with caution given the very high volatility, spreading out their buys and sells over time. We believe it will take quite some time for investor confidence to return to the AI sector, which has been shaken. We would like to emphasize that the long-term prospects for leading companies have not formally changed, and market participants are reacting to the growing uncertainty regarding the scale of data center construction.

The highlight of the day will be the Labor Department’s October report, which is scheduled for release at 8:30 a.m. ET. The consensus estimate for nonfarm payrolls is 65,000, following 29,000 in September (Freedom Broker’s estimate: 45,000). According to our forecasts and market consensus, the unemployment rate will remain at 4.2%. If it rises to 4.3%, this could limit the Fed’s ability to further tighten monetary policy. The market also expects wage growth to accelerate from 0.1% to 0.3% MoM. Freedom Broker analysts consider the most favorable scenario for tech stocks to be moderately weak hiring without-wage growth exceeding expectations, coupled with steady business activity. At 10:00 a.m. ET, the University of Michigan Consumer Sentiment Index will be released (consensus: 47.75 points).

Today, John Williams, president of the Federal Reserve Bank of New York, and his colleague from St. Louis, Alberto Musalem, will deliver remarks. Federal Reserve Board member Michelle Bowman will also provide comments. Lori Logan, President of the Federal Reserve Bank of Dallas, did not address the topic of monetary policy yesterday, but on October 30 she stated that the current rate is at least 50 basis points below the level at which policy would become moderately restrictive.

The sell-off spread to Asia: South Korea’s KOSPI plunged by more than 8%, leading to a temporary halt in trading, while Japan’s Nikkei fell by about 6%.

Before the market opens this Friday, Enbridge (ENB), Moderna (MRNA), Humana (HUM), Vistra (VST), and Charter Communications (CHTR) will report their earnings.

U.S. index futures are showing mixed trends: Nasdaq-100 contracts are up more than 1.5%, while S&P 500 contracts are rising moderately. Given the sell-off that has already taken place, we assess the risk balance for the upcoming trading session as neutral, with elevated volatility. A technical rebound following the massive sell-off could provide support for the market, while uncertainty surrounding data center construction and the Fed’s policy of tightening monetary policy remain headwinds.

— Atlassian (TEAM) shares plummeted by about 16%, even though the company’s quarterly revenue came in at $1.77 billion, compared to a consensus estimate of $1.71 billion. Investors were disappointed by the outlook: even after the upward revision, it projects revenue growth for fiscal year 2027 of approximately 13.75%, compared to 24% year-over-year in the first quarter.

— Cloudflare (NET) shares soared nearly 13%. The company’s third-quarter revenue rose 39% year-over-year to $782.5 million, compared with consensus estimates of about $737 million. This marked the fastest growth rate in nearly four years. The fourth-quarter forecast also exceeded consensus estimates. The market continues to reward accelerated growth and punish slowdowns.

— Airbnb (ABNB) shares are up more than 10%. The company’s third-quarter revenue rose 19% year-over-year to $4.87 billion, beating the consensus estimate of $4.75 billion. Airbnb raised its revenue growth guidance for 2026 and approved a $12 billion share buyback. The earnings report demonstrates the resilience of travel demand.

— Shares of companies in the AI infrastructure sector are rebounding after a sell-off. IREN (IREN) shares, which had fallen nearly 17% the previous day, are up more than 13%. The company’s revenue for the first quarter of fiscal year 2027 increased by 66% quarter-over-quarter to $228 million, exceeding the market’s average consensus estimate of $221 million. However, IREN now does not expect to reach annual recurring revenue of over $4 billion until January 2027 at the earliest. The delay in achieving this goal is due to changes requested by a client (according to management, Microsoft) and delivery schedules.

— Lam Research (LRCX) shares, which fell 16.4% on Thursday, are rising more than 7% following the approval of a $25 billion share buyback program. Delays in bringing new capacity online, however, remain a risk for the sector.

Trading on November 5 on U.S. stock markets ended with a sharp decline that wiped out the previous day’s gains. The S&P 500 plummeted 4.36%, the Nasdaq-100 plummeted 6.36%, the Dow Jones fell 3.44%, and the Russell 2000 dropped 4.45%. The VIX volatility index rose from 16.6 to 28.2 points.

AI-related stocks posted the sharpest declines. Shares of AMD (AMD: −17.3%) and Micron (MU: −17.5%) topped the list of underperformers in the S&P 500. Nvidia (NVDA: −9.3%) exerted the most downward pressure on the index. The IT sector (XLK) lost 8%, while the industrial sector (XLI) fell 4.12% due to a plunge in the share prices of data center equipment suppliers. Telecoms showed resilience: the XLC sector index fell by only 0.59%.

On the NYSE, there were 5.65 times as many declining stocks as advancing ones, and the equally weighted S&P 500 outperformed the main index by nearly 150 basis points. The sell-off primarily affected the largest companies.

The main reason for the decline is concern that the results of the midterm elections will slow down the construction of data centers. Voters in 10 states supported restrictions on such projects. Texas’s governor-elect has promised a moratorium on new facilities. According to SemiAnalysis, this state accounts for nearly 30% of the capacity scheduled to come online in the U.S. by 2028. For the market, this poses the risk that demand for chips will materialize later than expected. The negative sentiment was exacerbated by reports from Bloomberg that Microsoft (MSFT) is reviewing the terms of its partnerships with cloud providers, as well as a 2.7% rebound in WTI crude oil prices to $90.52 per barrel.

Amid a sell-off in stocks, yields on two-year Treasuries fell by 12 basis points to 4.46%, while yields on 10-year Treasuries fell by 5 basis points to 4.83%. Short-term bonds are the most sensitive to rate expectations, and the market has begun to price in a slower tightening of monetary policy: a slowdown in the development of AI infrastructure could have an adverse effect on the economy.

Beth Hammack and Thomas Barkin, presidents of the Cleveland and Richmond Federal Reserve Banks, respectively, called for further gradual rate hikes. The number of initial claims for unemployment benefits for the week was 189,000, compared with a consensus estimate of 196,000.

Not even strong earnings reports from a number of companies could help the AI sector. The sell-off affected Arm (ARM: −13.1%), Coherent (COHR: −13%), and Qualcomm (QCOM: −9.5%). AppLovin (APP: +31%) was the exception—it was the top performer in the index. Outside the tech sector, strong earnings reports continued to support stock prices. Tapestry (TPR: +7.1%) posted solid gains, while Cigna (CI: −1.45%) and ConocoPhillips (COP: −1.04%) lost significantly less than the S&P 500.

This article was AI-translated and verified by a human editor