Stocks drop 3.4% as election results hit AI trade

A volatile week on Wall Street ended with major indexes lower as investors processed the results of Tuesday's midterm elections. The market had surged earlier in the week when voting concluded, but that relief rally collapsed on Thursday. The selling concentrated in technology and artificial intelligence stocks, while defensive sectors such as healthcare and consumer staples moved higher.

The numbers illustrate the sharp reversal in sentiment. On Wednesday, the Dow Jones Industrial Average jumped 3%. The S&P 500 and the Nasdaq Composite each gained about 1.5%. By Thursday, all three benchmarks recorded their worst single-day performances since April 2025. The Nasdaq plunged 5.5%, dropping into correction territory. A correction is defined as a decline of at least 10% from recent highs. The tech-heavy index had set a record high just over a month prior.

The selling pressure stemmed from concerns that a Democratic majority in Congress could slow the construction of new data centers. Jim Cramer, the host of the CNBC Investing Club, noted that the initial optimism following the election might have been misplaced. He warned that the market reaction could shift as investors weighed the fiscal implications of the political outcome.

Specific stocks bore the brunt of the sell-off. Micron lost more than 17% of its value in the session. Intel and Nvidia fell by over 10% and 9%, respectively. These three companies were the worst performers in the club's portfolio for the week. The decline reflected fears that projected earnings for chipmakers and power companies were too high if fewer data centers come online in future years.

In contrast, Cardinal Health finished Thursday in the green after reporting strong quarterly results before the market opened. The stock rose 8.5% for the week, making it the best performer in the portfolio. The club took profits on the gain and trimmed its position in Eli Lilly to increase its cash reserves.

Friday brought a partial recovery. The Dow ended the day modestly lower, while the S&P 500 and Nasdaq staged a bounce-back rally. Despite the rebound, the week's final tally showed a net loss for the major indexes. The Dow finished down 1%, the S&P 500 fell 2.7%, and the Nasdaq dropped 3.4%.

The performance pattern continues a trend from October, where tech stocks slumped while defensive parts of the market gained. Analysts noted that not all AI-related companies face the same risk. Neocloud firms that rely on new financing to grow are more vulnerable than established hyperscalers. Companies like Amazon, Alphabet, and Microsoft benefit from massive scale and can adjust spending levels if the AI boom cools.

At the CNBC Investing Club's 4th Annual Meeting held on Friday at the New York Stock Exchange, Cramer outlined the strategy for the coming weeks. He said the goal is to lighten exposure to data center stocks and invest in non-AI companies. Cramer stated, 'I want to circle the wagons around the best and redeploy capital into other, less risky stocks, continuing my paring, going for the best and taking losses if we have to, to get to higher ground.'

The club has been executing this strategy for several weeks. In addition to trading Cardinal Health and Eli Lilly, the portfolio added to positions in Boeing and Goldman Sachs to increase non-tech exposure. The fund also trimmed DuPont twice to boost its cash position. Cramer reported that more than 15% of the club portfolio is now held in cash. He noted that he has ample dry powder available but added that it is not burning a hole in his pocket.