Tech stocks log worst day since 2020 as carnage comes to the AI trade

By Tomi Kilgore and Joy Wiltermuth

S&P 500 loses an estimated $2.9 trillion in market capitalization, the largest one-day loss of market value on record

The S&P 500 and Nasdaq both lost several trillion dollars in market capitalization Thursday.

Stocks endured a broad beating on Thursday, unlike anything seen in more than a year, as fears of an end to the artificial-intelligence trade compelled investors to sell first and ask questions later.

In the aftermath of the stock market's worst day since the panic that greeted President Donald Trump's "liberation day" tariff announcement in April 2025, the first question is, what happened?

The relief investors felt on Wednesday, after uncertainty surrounding the midterm elections was wiped away by Democrats' dominant performance, was overtaken by the realization that the blue wave was actually looking bad for the AI buildout. That led to a wipeout in what's been at the center of the AI trade - the semiconductor sector.

The PHLX Semiconductor Index SOX plunged 10.5%, its worst day since the height of the pandemic market panic of March 2020. And the S&P 500 Information Technology XX:SP500.45 sector dropped 7.3%, while the tech-heavy Nasdaq-100 NDX sank 6.4%, also the biggest declines for both since March 2020.

The more the market fell, the more traders had to sell. As explained by Jack Janasiewicz, portfolio manager at Natixis Investment Managers Solutions, there was "massive deleveraging" as investors received margin calls because losses exceeded limits defined by accounts traded on margin, and were forced to sell their positions.

"It seemed like everybody is selling," Janasiewicz said.

That led to the next question for investors: Is the AI trade over? The chart below shows that the SOX SOX dropped below the line that has defined its uptrend since the April 2025 bottom, so there's a growing fear that the answer is yes.

The trend is no longer the SOX's friend.

The belief is that Democrats may push to slow down or even pause the buildout of data centers needed to power AI, which would hurt chip makers. But there also was a briefly held idea that other areas of the AI trade, including the megacap cloud-computing companies known as hyperscalers, would benefit from a slowdown.

But given the ferocity of the selling in chip stocks, the weakness bled into all areas of the AI trade. The selling also filtered through to sectors of the market known as defensives, such as healthcare and consumer staples, which had been rallying in the face of the recent tech weakness.

"I expect to see further headlines surrounding forced liquidations, especially after today," Adam Turnquist, chief cross-asset strategist at LPL Research, said in an email exchange with MarketWatch.

Hedge funds have been losing on both sides of their trades, he said, as stocks they perceived would be AI winners were dropping, while those that they expected to be AI losers were outperforming. So they basically had to sell everything.

"This is the pain trade causing so much damage," Turnquist wrote.

The S&P 500 index slid 4.4%, the Nasdaq Composite COMP lost 5.5% and the Dow Jones Industrial Average DJIA shed 1,833.06 points, or 3.4%, in the biggest one-day percentage losses for all three indexes since April 2025.

That triggered a massive jump in what is known as the market's "fear gauge" - the Cboe Volatility Index VIX, which tends to rise when the market falls. The VIX rocketed 69.7%, its biggest gain in two years, to its highest close since March 30, 2026.

-Tomi Kilgore -Joy Wiltermuth

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11-05-26 1700ET