Midterm Results Deepen AI Market Divide Between Tech Giants and Debt-Reliant Firms

The United States midterm elections have intensified a growing split in the artificial intelligence market, favoring established technology giants while pressuring companies that rely heavily on debt to expand their infrastructure. Investor sentiment shifted sharply as the results suggested that new political leadership in key states could impose stricter regulations on data center construction and financing.

Democratic victories in several gubernatorial races have raised concerns about increased scrutiny for large-scale data center projects. In Texas, Democratic governor-elect Gina Hinojosa has proposed a statewide moratorium on new data center permits. While the plan reportedly exempts projects that are already under construction, the proposal adds to the uncertainty surrounding how quickly new capacity can be built and funded.

Market reactions on Wednesday reflected this bifurcation. Shares of Microsoft and Amazon each rose by more than 6%, signaling strong confidence in their current positions. In contrast, CoreWeave, a major provider of AI infrastructure, saw its stock plunge by approximately 10%. Chipmakers also experienced declines, with Micron falling 7% and Nvidia dropping 3.17%.

James Sullivan, managing director and co-head of global fundamental research at JPMorgan, explained to CNBC's Squawk Box Asia on Thursday that differences in borrowing costs are driving this performance gap. He noted that borrowing spreads have widened significantly for neocloud companies, making their cost of additional capital much higher than that of hyperscalers. These larger firms benefit from more diversified customers and revenue streams, which provides them with greater financial stability.

Sullivan stated that the divergence in equity performance is largely driven by the view that existing capacity is now significantly more valuable due to incremental supply constraints. If the midterm results lead to more vulnerable permitting processes for new projects, this view could be further reinforced, making current infrastructure assets more critical to the AI ecosystem.

The potential impact of these regulatory changes is uneven across the construction pipeline. Nomura, an investment bank, noted in a report on Wednesday that much of the data center capacity expected to come online in 2027 is already under construction. This limits the near-term impact of new restrictions. However, projects planned for 2028 face greater exposure to permitting delays and regulatory uncertainty, suggesting that tighter regulations could become a more significant headwind to AI investment starting in that year.

Financial stress is already evident in the credit markets for some AI infrastructure providers. Shares of Nvidia-backed neoclouds CoreWeave, Nebius, and Iren fell at least 30% in October as tightening credit markets raised questions about project financing. CoreWeave's five-year credit default swap spread surged past 1,100 basis points, indicating rising costs for investors seeking protection against a potential default.

BMI, a research firm, warned that a sharp slowdown in data center construction and AI investment could lead to a greater-than-expected decline in overall investment, according to its post-midterm analysis reported by The Business Times. The firm highlighted the risks associated with potential regulatory hurdles that could slow down the pace of expansion.

JPMorgan Asset Management observed that the key distinction between companies lies in their ability to absorb delays and fund the capacity they do build. Hyperscalers possess broader cloud businesses and more internally generated cash flow, allowing them to navigate these challenges more effectively. In contrast, lower-rated neoclouds face greater exposure to borrowing costs, energy prices, and refinancing conditions.

The asset manager further noted that financially stronger hyperscalers are well-positioned to take advantage of this market shift. They could secure cheaper capacity or acquire assets from weaker operators who may be forced to scale back their ambitions due to the increased regulatory and financial pressures.