US stocks’ sharp plunge following the midterm elections has upended Wall Street expectations, with institutions warning that forced fund position cuts could spark a new round of sell-offs.

According to Bloomberg, Wall Street trading desks had previously expected that after the U.S. midterm elections, off-exchange funds would re-enter the market, driving a recovery in U.S. stocks, but the market subsequently sold off. The Nasdaq 100 index fell 6.4% on Thursday, its largest drop since 2020, erasing roughly $2.3 trillion in market value. The sell-off spread to other markets, with Asian benchmark stock indexes falling nearly 4%, while UK and European markets saw relatively smaller declines. Investors are concerned that the Democrats' landslide victory in the elections, along with public opposition to data center expansion, will slow AI buildout. Positioning, sales by systematic investors, and rapid unwinding of crowded hedge fund bets may also explain the speed and scope of the sell-off. Bruno Schneller of Erlen Capital Management warned that as losses mount, risk managers may force funds to cut exposure, which could trigger another sell-off regardless of fundamentals. In credit markets, ING is seeking to offload a roughly $500 million portfolio of data center loans in a single transaction. The sale comes days after the Democrats swept the midterms, stoking concerns about the future of many such projects. However, as of press time, U.S. stock futures and some AI-related stocks were rebounding in pre-market trading on Friday. Nvidia rose 4.3%, Broadcom gained 5.3%, AMD climbed 8.3%, Marvell advanced 8.2%; in the storage sector, Micron jumped 8.5%, SanDisk rose 9.6%, and Western Digital gained 6%. Markets with smaller AI trading exposures held up relatively better. Emmanuel Cau of Barclays said that given the policy gridlock, the current indiscriminate sell-off appears excessive relative to the likely policy outcomes, but the market still needs time to stabilize; if tail risks from oil prices fade, Europe could be a relative beneficiary.