Data center stocks fall after midterms

CoreWeave shares fell almost 10% on Wednesday as investors reacted to Democratic victories in the midterm elections. The drop in this smaller AI computing provider was part of a wider sell-off in a group of firms known as neoclouds. These companies rely heavily on debt to fund their expansion plans. The market moved sharply despite a general rally in Wall Street following the election results.

The political shift created immediate concerns for the AI infrastructure sector. Democratic candidates who advocate for limits on data center construction won governorships in Texas and Ohio. Texas accounts for about 25% of current data center construction, according to Bernstein analysts. Voters in various communities also approved local ballot measures that restrict such projects. Democrats also secured control of both chambers of Congress.

Large cloud computing firms moved in the opposite direction. Amazon stock rose by 7%, while Microsoft climbed more than 6%. Alphabet, the parent company of Google, gained nearly 4%. Jim Cramer of CNBC described these firms as incumbents that already possess large-scale infrastructure. He noted that strong customer demand supports their current operations.

Cramer suggested that the market views a moderation in future spending from these giants as a positive development. He explained that this discipline could allow their cash flows to rebound. Investors appear to believe the election results will rein in the high expenses previously incurred by Amazon, Microsoft, Meta, and Alphabet. This perceived spending restraint is being treated as a favorable signal, even if it stems from political pressure.

Smaller upstart computing providers faced steep declines. Iren shares fell 11%, and Nebius slid about 6.5%. These losses compounded their drawdowns from year-to-date highs. Cramer argued that the midterms do not mark the end of the data center era, but they may make financing more difficult. He stated that neoclouds are the entities least likely to secure marginal capital in this new environment.

Suppliers of AI infrastructure equipment also saw their stock prices decline. Eaton shares fell 9%, erasing the gains from its strong earnings report on Tuesday. GE Vernova dropped 10% despite reporting strong third-quarter results and a growing backlog of gas turbines. Both companies traded well below their year-to-date peaks. Semiconductor stocks came under pressure as well. Marvell declined 8% and Arm fell 5%.

Micron and Intel dropped 5.5% and 3% respectively, while Nvidia lost 1%. Qnity Electronics, a key supplier of chip manufacturing materials, was slightly lower despite reporting a beat-and-raise quarter earlier in the day. Cramer recommended buying Qnity, suggesting that the data center trade has not been entirely eliminated by the election results. Apple shares jumped 6% as investors reassessed the impact of AI-driven memory costs on margins.