Midterm Shock Sends Nasdaq Down 5.52%, S&P 500 Down 4.36%

Grace Kim

The Nasdaq fell 5.52% on Thursday after the U.S. midterms, while the S&P 500 dropped 4.36%, its biggest one-day decline since just after April 2025’s Liberation Day tariff announcements.

AI-exposed stocks led the retreat. Investors questioned whether election outcomes would slow data-center construction and tighten controls on model developers. At Friday’s New York open, the S&P 500 recovered 1% and the Nasdaq gained 2%.

What changed after the midterms?

On Wednesday, the day after the midterms, equities rallied on relief that the election results were clear. A Democratic majority in both the House and Senate was beyond dispute. Alaska and Mississippi Senate tallies remained unsettled. President Donald Trump accepted the results.

Rebecca Patterson, a Council on Foreign Relations researcher, wrote that investors who had positioned for a contested count lasting days or weeks, as after the 2000 and 2020 presidential elections, unwound “risk premium” positions once a prolonged contest appeared unlikely.

On Thursday, investors digested those implications. Local ballot measures across ten states nearly all backed data-center restrictions. Democratic candidates also campaigned against expansion. Both developments threatened the outlook for companies tied to AI.

The Nasdaq decline resembled single-day losses in April last year and March 2020. Political uncertainty spread into other asset classes and markets worldwide, reflecting links between global finance and the supply chains that support AI.

What does the selloff signal about the economy?

Fears grew that the so-called AI bubble could soon pop. Patterson cautioned: “It is too early to know if a potential policy shift following the midterm election will prove the catalyst for sustained equity selling and slower economic growth.” Investors would need to reset expectations for the timing and scale of revenue from AI infrastructure.

At the end of October, eight AI-exposed S&P 500 companies represented more than one-third of the index’s total market capitalization. The group comprised Apple, Nvidia, Microsoft, Alphabet, Amazon, Meta, Tesla and Broadcom. Their performance now carries unusual weight in U.S. and several overseas equity markets.

AI also supports broader growth in recent years through equity-generated consumer wealth and construction tied to infrastructure. A slowdown could restrain economic activity and produce a more moderate path for Federal Reserve rate hikes. By early Friday, just before the payroll release, futures had reduced the hikes priced through June 2027 by 15 basis points.

Oil also moved markets. The expectation that a Democratic Congress could push to end the Iran war appeared important to Wednesday’s rally. Brent crude fell nearly 9%. Lower oil prices likely influenced Federal Reserve expectations as well. AI speculation still dominated because of its outsized role in global markets and economic prospects.

Is the economy strong enough to absorb the shock?

Employment and income support consumption, which supports corporate revenue and, in turn, the equity values that now carry such heavy weight across AI-exposed markets today. October nonfarm payrolls were significantly stronger than expected, with large positive revisions to recent months. Monthly data can be volatile and subject to revision each month.

Continuing jobless claims provide a weekly check on unemployment. They have fallen 9.6% so far in 2026 and remain historically low. That supports consumption and, in turn, corporate earnings. The claims data arrive every Thursday, making the series worth monitoring in the coming months.

Prolonged equity losses could create a negative wealth effect. Households might spend less. Companies could lose revenue and cut expenses, including jobs. That chain would weaken the economy, although the current labor market offers reasons for cautious optimism.

Is the selling fundamental or technical?

Investors usually weigh both fundamentals and technical forces when they enter or exit positions. Forced selling can arrive when leveraged exchange-traded funds trigger margin calls. Patterson called that pressure temporary. It usually lasts days or weeks, and the incremental selling eventually ends.

The Direxion Daily Semiconductor Bull 3X ETF delivers three times the return of the New York Stock Exchange Semiconductor Index. Bloomberg data showed that it fell more than 37% on Thursday. Many investors likely faced margin calls, exited positions and amplified the selling wave.

Expectation-driven selling occurs regularly. Patterson’s historical review found that the S&P 500’s average annual maximum peak-to-trough drawdown for each calendar year since 2000 was minus 15.7%. Thursday’s fall left the index only 6.25% below its recent record high. The review found positive annual returns 70% of the time.

In years with negative index returns, the economy was entering or nearing recession in the vast majority of cases. History provides context, not a forecast. The current labor market and the possible short life of both expectation resets and technical selling support Patterson’s cautious optimism.

Politics, policy, financial markets and the economy remain tightly linked. Policymakers should monitor market and economic trends, while investors should watch political risk. Weekly claims, the next payroll report and any lasting data-center restrictions will show whether the election shock becomes a sustained constraint on AI infrastructure capacity and the timing and scale of AI revenue.