Investors fear Musk companies could face Democratic scrutiny in new Congress

Two days after Democrats won overwhelmingly in the national midterm elections and in state races across the country, investors began coming to terms with the potential consequences. Fears that an incoming Democratic Congress would tighten AI regulation sent the tech-heavy Nasdaq down more than 5% on Thursday, wiping out more than $2 trillion in market value. The Dow Jones Industrial Average and the S&P 500 also sank.

By the end of Thursday’s session, the Nasdaq Composite stood at 25,736.51, with the S&P 500 at 7,688.62 and the Dow Jones Industrial Average at 51,523.06, according to FRED data as of Nov. 5.

The losses marked a stark reversal from Wednesday, when investors initially sent shares higher across the board, relieved that the midterms did not end with the fate of Congress undecided.

The selloff carries stakes beyond Wall Street. AI has become a big driver of the U.S. economy, helping it post annual growth of 3.4% in the July-September quarter. Average Americans also own shares in AI companies through retirement investment portfolios, such as 401(k)s or pension funds, leaving them also vulnerable to a prolonged AI rout, according to NPR.

Thursday’s sobering-up across markets reflected investors’ concern about a big signal sent by voters, NPR reported: a revolt against AI data centers, which many people worry will consume water and energy resources. Those voters supported Democrats who have vowed to push back against the proliferation of the projects.

Many AI companies — including Meta and Alphabet, the parent company of Google — need to keep building out these data centers to continue developing the technology.

The Nasdaq’s decline came after what has already been a rough year for technology shares on Wall Street, with investors starting to question whether the massive investments companies have plowed into AI will pay off anytime soon.

“There is some concern regarding AI regulation, and fears that there could be far more regulations coming to AI technology, as well as a pushback on the buildout of data centers across the country,” said David Busch, chief investment officer of Trajan Wealth.

AI-related or AI-dependent stocks of all kinds were among Thursday’s biggest decliners, with Tesla and SpaceX — both controlled by billionaire Elon Musk — falling particularly sharply. Musk spent hundreds of millions of dollars in an unsuccessful attempt to elect more Republicans, and investors fear he and his companies could also come under Democratic scrutiny when the new Congress is seated in January.

The concern extends beyond Congress. Democrats who have vowed to slow down AI development also won at the state level, most prominently Gina Hinojosa, who won the Texas governor’s race.

It remains unclear whether the AI stock rout will continue — or spread beyond technology stocks.