U.S. stocks experienced a rare panic overnight.

The Nasdaq fell 5.52%, the S&P 500 dropped 4.36%, and the Dow slid 3.44%. The “Magnificent Seven” tech stocks lost about $1 trillion in market value in a single day. The Philadelphia Semiconductor Index plunged more than 12%, SanDisk fell 22%, Micron and AMD dropped around 17%, and Nvidia lost more than 9%.

Why did stocks fall?

First, a “blue wave” in the midterm elections triggered fears of AI regulation.

The Democrats won control of both chambers of Congress and made gains in states where data center construction is booming, such as Texas and Georgia.

Markets fear data centers could face tighter environmental, power and land-use approvals, or even temporary construction halts.

UBS estimates that about 30% of planned new data center capacity in the U.S. could be affected.

This directly undermines the chain of “continued expansion in AI computing power → continued growth in chip orders → ever-increasing capital spending by cloud providers.”

Second, anxiety over returns on AI investment is shifting from market sentiment to pressure on earnings reports.

Free cash flow at companies such as Google, Amazon, and Meta is under pressure, while Intel’s earnings guidance is weak. The market is starting to ask: after hundreds of billions of dollars have been poured in, when will the profits catch up?

Third, valuations across the semiconductor and computing-power supply chains are too high, and positioning is crowded.

So far this year, the market has been overly optimistic about AI, especially AI hardware. After large gains and concentrated institutional holdings, any reversal in expectations could amplify losses as algorithmic stop-loss orders, leveraged position unwinding, and retail selling all pile on.

The sharp rise in the VIX also indicates that fear is clearly mounting.

In addition, hawkish signals from Fed officials, rising oil prices that have heightened inflation concerns, and pressure from the dollar and Treasury yields are weighing on high-valuation growth stocks.

After a drop like this, many people want to know: have the risks posed by a Democratic victory already been priced in?

The short answer is that we can’t simply say they have been priced in.

More precisely, the market has only completed the first stage of pricing: the Democratic victory itself.

But what will truly affect AI valuations is the policy rollout that follows, and that remains uncertain.

You could say Wall Street saw the bad news and decided that discretion is the better part of valor. But on reflection, is everyone’s assessment of this risk really clear?

I don’t think it is. After all, quantifying these negative factors in terms of profits, cash flow, and valuation models is difficult—or perhaps there simply isn’t enough concrete data yet.

So, in the short term, policy uncertainty has not been adequately priced in.

We may get answers only after Democrats actually take control of both chambers and AI regulation, data center approvals, grid connection costs, taxes, and antitrust investigations are all revisited.

Nvidia’s earnings report on the 17th of this month may offer some data and insights from management, so it’s worth watching.

The market had been pricing in “light-touch regulation + rapid expansion”; now it has to reassess the pace of capital spending and the timeline for returns.

Broadly speaking, AI is not being banned, but its expansion may slow.

Neither party wants the U.S. to lose its AI advantage, but Democrats place greater emphasis on compliance, energy consumption, antitrust, and the public interest.

This means AI will continue to develop, but the road ahead may shift from a clear run with every light green to having to wait at certain intersections for the lights to change.

The impact also varies across the industry supply chain.

“Picks-and-shovels” businesses such as chipmakers, memory suppliers, optical module makers, data center operators, and power equipment providers are most sensitive to the pace of construction. The same logic applies to stocks listed in mainland China and Hong Kong.

Cloud giants that already have substantial computing capacity up and running have a relatively larger buffer, and may even see the value of their existing assets rise if supply is constrained.

There is also a countervailing argument.

Some institutions believe tech companies may accelerate capital spending before the policies are fully implemented; if future expansion of computing capacity is restricted, existing capacity could become even more scarce.

But this can only offset some of the risks; it does not negate the valuation discount that tighter regulation could bring.

Overall, the impact of this midterm election was somewhat unexpected, but it also exposed some issues, such as overly high expectations and valuations.

But I believe this is not necessarily a bad thing. Things had gotten too heated, so it may be time to tap the brakes. Most importantly, we must be clear that the AI industry’s development trajectory is set; it won’t change just because control of both chambers has changed hands.

For investors, it really is like trying to catch a falling knife right now. If you can’t tell whether it has finished falling, it’s better to stay out for now and reassess once things become clearer.

On the news front, pay close attention to statements by Democratic officials and the views of AI companies;

On the fundamentals front, focus on corporate earnings reports, especially Nvidia’s report on the 17th and Micron’s report next month.