Why Wall Street sees the AI selloff as overdone despite regulatory risks

Wall Street is betting that the latest selloff in artificial intelligence stocks is more of a market overreaction than the beginning of a deeper correction. Major brokerages, including Morgan Stanley, UBS and HSBC, believe concerns over tighter regulation under a Democratic-controlled US Congress are being overstated, with the underlying AI investment story largely intact.

The November 5 selloff triggered concerns that a shift in political power could threaten the massive investments technology companies are making in data centres and AI infrastructure. However, analysts argue that the likelihood of extreme regulatory intervention is low and that any restrictions are more likely to delay individual projects than derail the broader AI spending cycle.

Morgan Stanley described last week’s market correction as overdone, suggesting that some data centre projects could be pushed from 2028 to 2029 rather than cancelled altogether.

The brokerage argued that such delays could actually extend the AI capital expenditure cycle, allowing supply and demand across the data centre ecosystem to rebalance more smoothly. This could also improve the credit outlook for companies involved in the infrastructure buildout and support higher leasing rates for computing capacity.

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Morgan Stanley recommended investors “buy the drop”, maintaining a positive outlook on major AI hyperscalers such as Amazon, Meta Platforms and Alphabet.

It also identified opportunities across the AI supply chain, including semiconductor companies Nvidia and Broadcom, data storage firms Seagate and Western Digital, and optical networking companies Coherent and Lumentum.

Why brokerages are not worried about political risks

UBS analysts said markets had become excessively pessimistic about three major concerns: political risks surrounding AI, the credit risks associated with financing data centre expansion, and the sustainability of AI-related spending.

Experts pointed to historical market performance, noting that daily declines of more than 4 per cent in the S&P 500 have often been followed by strong returns. Historically, the benchmark has gained an average of 11.9 per cent over the following six months and more than 20 per cent over 12 months after such declines.

What could trigger the next AI stock rally?

Rather than political developments, brokerages believe upcoming corporate events could have a greater influence on the direction of AI stocks.

Morgan Stanley and other analysts are closely watching Nvidia’s quarterly earnings, scheduled for November 17. The chipmaker is expected to report more than 12 per cent sequential growth in data centre revenue, making its results an important indicator of whether demand for AI computing infrastructure remains strong.

Another potential catalyst is the anticipated initial public offering of AI research company Anthropic, which HSBC identified as a key event for markets in the coming weeks.

HSBC said it was using last week’s correction to increase its equity exposure again, with a renewed preference for technology stocks in the US and Asia.

The broader message from Wall Street is that the AI trade may be facing political uncertainty and valuation concerns, but the investment thesis has not necessarily broken down.

All three major US stock indexes rallied more than 2 per cent on Monday, November 9, signalling a strong rebound after the previous week’s selloff.