Global Stock Markets Tumble Amidst AI Infrastructure Concerns

Global stock markets experienced significant declines on Thursday, particularly in the technology and semiconductor sectors, two days after Democrats secured control of both houses of Congress and following a disappointing report from Qualcomm. The Philadelphia Semiconductor Index plummeted by approximately 11%, the Nasdaq Composite fell around 5%, and the S&P 500 dropped about 3.4%. Major Asian markets also saw sharp decreases, with Seoul's Kospi down 5.3% and Tokyo's Nikkei losing 1.8%. Tel Aviv's TA 35 index fell by roughly 3.7%.

However, analysts caution against viewing this as a general market collapse. Instead, the sell-off appears to target a specific assumption: that the build-out of AI infrastructure would continue at its current pace, fueled by unlimited funding and without political opposition. These three conditions are now facing challenges. The distinction between a targeted correction and a broad crash is evident in market data, where the average S&P 500 stock (equally weighted) rose over 4% in the month preceding the elections, while the Nasdaq 100 lost nearly 10%. This divergence, according to Citadel Securities, is the widest since the dot-com bubble in 1990.

Nvidia, a dominant supplier of AI chips, is at the center of the downturn, with its stock falling about 8% to below $200. The company's market capitalization significantly impacts the S&P 500, reflecting the construction of server farms. The decline in Nvidia's stock suggests a slowdown in these projects due to local regulatory hurdles. The broader market indices are heavily influenced by a few large tech companies, which constitute a substantial portion of major indexes like the S&P 500 and South Korea's Kospi, causing national indexes to fall when the tech sector falters.

The VIX, or fear index, surged dramatically, indicating market panic rather than mere nervousness. This suggests investors have identified significant, previously unpriced risk. While national legislation to halt server farm construction is unlikely, local opposition is mounting. S&P Global reports that local governments in 40 U.S. states have active moratoriums or bans on server farms, with New York implementing a statewide moratorium. Even Texas, previously promoting itself as an AI hub, has frozen new permits, and numerous local ballot initiatives aimed at restricting construction were voted on this week.

Funding for AI infrastructure is also becoming more challenging. Cloud giants are increasingly raising capital through stock and bond offerings, indicating a higher cost of capital. For instance, Alphabet raised $85 billion in June, and Oracle announced a $20 billion raise, with its credit default swap spread widening significantly. The market is still willing to fund AI, but it demands a higher risk premium, unrelated to general interest rates, which have been falling.

Israel's market was disproportionately affected, with the TA 35 index's 3.7% drop exceeding that of the S&P 500 and the European STOXX 600. This is attributed to the high weighting of semiconductor and technology companies in the Tel Aviv Stock Exchange, which are integral to the AI supply chain. The Israeli Shekel also weakened against the dollar, a common pattern when foreign markets decline as institutional investors hedge their currency exposure. Israeli savers are impacted through both Wall Street and the local exchange. Geopolitical risks, including potential conflict escalation in Iran and political uncertainty in the U.S., are also contributing factors. The market is now pricing in political and regulatory risks alongside technological limitations for the AI sector's future growth. Nvidia's upcoming earnings report later in November will be a key indicator.