US tech stock rout: is the AI bubble bursting?

Explainer US tech stock rout: is the AI bubble bursting? After Thursday’s share price plunge on Wall Street, could the volatility be the start of a huge market meltdown?

Global financial markets have been thrown into a tailspin as investors bet on an AI slowdown after the US midterm elections.

This is not the first time stock markets have wobbled in recent months due to concerns over a tech bubble. But could this volatility be the start of a huge market meltdown?

Shares on Wall Street plunged on Thursday , in a rout driven by AI and technology stocks that extended to Asia and Europe on Friday.

More than $3.2tn (£2.4tn) was wiped from the value of the US stock market on Thursday – bigger than the annual output of the Canadian economy – after the tech-heavy Nasdaq fell by 5.5% and the blue-chip S&P 500 fell by 4.4%.

After months of warnings over the valuations of AI companies – amid fears of tinderbox conditions in the world economy fuelled by the Iran war and concerns that the tech bubble could burst – the trigger for the sell-off has been attributed to the Democrats’ sweeping US midterm election victory .

Investors are predicting that a Democrat-controlled Congress could lead to tighter control of AI and datacentre construction – slowing development in one of the engines of global economic growth and corporate earnings on the stock market.

Challenging billionaire power and calling out Wall Street and big tech were the rallying cries of many Democrats in the midterm elections. Moratoriums on datacentre construction were effectively on the ballot in several states amid growing public opposition to the building of vast, resource-hungry facilities.

Highlighting the stakes, the SpaceX and Tesla CEO, Elon Musk , set a record for election spending after pouring nearly half a billion dollars into backing Republicans – and moved his personal residence to Texas, the leading state for datacentre construction. After the midterms shares in both his companies fell sharply.

Fears of an AI bubble have been growing for some time, given the astronomical rise in tech company valuations, which some analysts said had become increasingly detached from reality.