Key Points
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An Election Night surprise bodes poorly for the stock market’s No. 1 catalyst: the AI infrastructure build-out.
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The bond market’s warning about the AI data center build-out has reached deafening levels.
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History shows that premium stock valuations aren’t sustainable over the long run.
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To say it was a rough day for Wall Street’s major stock indexes would be an understatement. The timeless Dow Jones Industrial Average (DJINDICES:^DJI) shed 1,833 points, the benchmark S&P 500 (SNPINDEX:^GSPC) lost 335 points, and the artificial intelligence (AI)-driven Nasdaq Composite (NASDAQINDEX:^IXIC) plummeted 1,422 points on Nov. 5.
While the Nasdaq Composite’s 5.52% decline didn’t crack the 20 largest percentage drops on record, its 1,422-point single-session loss shattered its previous record tumble of 1,122 points, set on June 5, 2026.
Missed AI’s “Act 1”? Act 2 Could Be 15x Bigger. Most investors think they missed the AI boat because they didn’t buy Nvidia in 2005. But according to our analysts, we’re only at the end of “Act 1″—the R&D phase. “Act 2” is the global rollout. Continue »
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The uncomfortable reality for investors is that there are three reasons these elevator-down moves may be just beginning.
A surprise election result could rake AI hardware stocks over the coals
Prediction markets widely forecast that Democrats would sweep Congress on Election Night, and that’s exactly what happened. By early January, President Donald Trump will be working with a Democrat-led Congress.
Trump has repeatedly stated that he’ll use his presidential veto power to effectively maintain the status quo. The Dow, S&P 500, and Nasdaq Composite initially rallied on Nov. 4 with the understanding that the president could veto stricter AI regulation bills sent to his desk from a Democrat-controlled Congress.
But what investors overlooked was a “blue wave” at the gubernatorial level. Democratic governors flipped five former Republican seats (two state elections have yet to be called by the Associated Press). Three of these flipped seats (Texas, Georgia, and Ohio) are focal points for data center planning and construction.
Democratic Governor-elect Gina Hinojosa of Texas has pledged to ban data center approvals until her state’s legislature passes laws on electricity, water, air, and property rights. Most Democratic lawmakers favor limiting data center expansion and stricter testing/vetting on large language models.
In other words, stricter AI regulation at the state level can circumvent Trump’s veto power.
This could be particularly damaging to AI hardware companies that have enjoyed never-before-seen pricing power. In addition to insatiable enterprise demand for AI infrastructure, persistent supply shortages have lifted the pricing power of AI hardware providers. If data center approval moratoriums result in a more balanced supply-vs-demand outlook for hardware, the pricing power and gross margin of leading AI stocks may crater.
Image source: Getty Images.
The bond market’s warning concerning the AI infrastructure build-out has reached deafening levels
Secondly, the bond market has, for months, been sending an unmistakable warning to equity markets that the AI infrastructure build-out was in trouble.
When public companies issue debt, it’s typically priced at a par value of $1,000, which is quoted as $1 on financial websites. Given that bond prices and yields are inversely related, yields go up if a bond trades below its par value.
The reasons bond prices might decline include skepticism about the long-term solvency of the underlying company or bond traders’ desire to receive a higher yield given the implied risk factors.
Several foundational companies tied to the AI infrastructure build-out have seen their bond prices collapse. Space Exploration Technologies‘ (NASDAQ:SPCX) recently issued 2056 notes are trading at $0.83 on the dollar; Nvidia‘s (NASDAQ:NVDA) 2060 notes are clocking in at $0.63 on the dollar; and CoreWeave‘s (NASDAQ:CRWV) 2031 notes (issued this year) are trading at $0.78 on the dollar.
These discounts to par value denote mounting skepticism regarding the sustainability of the AI data center build-out.
The stock market is historically pricey, and that’s never boded well for investors
The stock market also entered 2026 at its second-priciest valuation in history, according to the S&P 500’s Shiller Price-to-Earnings (P/E) Ratio, also known as the Cyclically Adjusted P/E Ratio (CAPE Ratio).
Whereas the time-tested P/E ratio is arrived at using trailing 12-month earnings, the Shiller P/E Ratio is based on average inflation-adjusted earnings over the trailing decade. When recessions arise and corporate earnings turn negative, the Shiller P/E Ratio remains useful, which isn’t always the case for the traditional P/E ratio.
When backtested to January 1871, the CAPE Ratio has surpassed 30 on six occasions, including the present. Following each of the previous five instances, the Dow Jones Industrial Average, S&P 500, and/or Nasdaq Composite eventually (keyword!) plunged between 20% and 89%.
Although the Shiller P/E Ratio offers no help in deciphering precisely when the stock market will reverse course or which catalyst will push it over the edge, 156 years of history conclusively show that premium valuations aren’t sustainable over the long run.
While AI growth rates have been off the charts, every next-big-thing investment trend for more than 30 years has eventually endured a bubble-bursting event early in its expansion. Historical precedent suggests it’s not a matter of if but of when the AI bubble bursts.
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Sean Williams has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool recommends Space Exploration Technologies. The Motley Fool has a disclosure policy.
