After US stocks dropped sharply on Thursday, led by semiconductor and AI infrastructure companies, and as investors assessed how the US mid-term elections might hit data-centre development, wealth managers react. Many remain constructive on the long-term outlook, but they argue that investors must diversify.

Market volatility increased significantly last Thursday, particularly across US technology, semiconductor and AI-related companies. The turbulence was diven by concerns that Democratic gains in the US midterm elections could result in more regulation of AI and tighter restrictions on data centre development, potentially slowing the pace of the AI infrastructure build-out.

This was a reversal from the initial post-election rally, when markets had responded positively to expectations of a potentially more conventional policy backdrop. The S&P 500 fell 4.4 per cent and the Nasdaq fell 5.5 per cent on Thursday. The Philadelphia Semiconductor Index fell 12.3 per cent, extending its drawdown since June to around 38.3 per cent. Pressure extended into Friday, with North Asia's tech-heavy indices leading declines.

Mark Haefele, chief investment officer at UBS Global Wealth Management, views the decline as a positioning reset rather than indicative of a lasting downturn in the AI investment cycle. He sees upside in broad equity indices over the next six to 12 months. “At the same time, with further volatility possible, investors should focus on managing concentration risks, rebalancing excessive technology exposure, and building a strong multi-asset core portfolio,” Haefele said.

“We believe the AI investment cycle remains intact, corporate earnings growth is resilient, and a positive global cyclical backdrop should support equities,” he added. “While we could see a period of market indigestion following the election results, we do not think fundamentals justify a prolonged downturn.”

Enrico Chinello, Next Generation Research, at Swiss private bank Julius Baer, also thinks the market could be misplacing the risk. “There continues to be bipartisan support on AI as a national strategic topic, and federal AI rules face a presidential veto. The more tangible risk could come from states curbing new data centre developments, particularly in Texas,” Chinello said. He sees a base-case scenario where developments are slowed down at the margin but are not entirely halted. He remains constructive on the cloud computing and AI theme.

Daniel Nilsson, senior fund manager at advisory firm Isio, has also not changed his long-term investment view. Nilsson remains constructive on equities over the longer term, supported by generally resilient corporate earnings and economic activity, while recognising that valuations and market concentration, particularly within US mega-cap technology, warrant some caution. He does not believe that short-term volatility of this nature is a reason to trade around his strategic positions.

“Diversification beyond US mega-cap technology remains important, with global small caps and emerging markets offering exposure to different regions, companies and drivers of return,” Nilsson said. “Emerging markets have also experienced a more difficult period amid recent volatility, reflecting the significant semiconductor and technology exposure in parts of Asia. The latest selloff extended into Asian chipmakers following Thursday's US moves.” However, he continues to believe that emerging markets offer attractive long-term opportunities.

“Infrastructure has provided a useful counterbalance to broader market volatility. Its return drivers can differ from broader equity markets, helping to diversify portfolios during periods when more growth-oriented areas are under pressure. This has been particularly evident during the recent sell-off, with infrastructure demonstrating its ability to provide stability when technology-related equities come under pressure,” Nilsson said.

“Fixed income can also play an important role in diversification, particularly in areas with limited direct exposure to technology and AI. Asset-backed securities and shorter-duration credit have held up well through the recent volatility, highlighting the benefits of exposure to different sources of return.

“Overall, we remain comfortable with our long-term investment outlook and do not believe the recent volatility warrants a significant shift in strategy. The recent selloff reinforces the importance of avoiding over-reliance on any single region, sector, or investment theme, particularly when market concentration and elevated valuations remain key risks.

“We therefore remain focused on staying invested and maintaining this diversification, while remaining flexible enough to respond to changing market conditions and take advantage of opportunities as they arise, rather than attempting to trade around short-term volatility,” Nilsson said.

His stance was shared by the CIO Office at Swiss private bank Lombard Odier which believes that the long-term case for AI remains intact. The bank views the recent weakness in AI-related stocks as an unwinding of crowded positioning, rather than a sign of slowing demand, earnings or capex growth.

“Bond yields have continued to fall during the equity selloff. That indicates that inflation fears remain contained. Importantly, the bond market is not signalling recession; rather, it is pointing to slower but sustainable economic growth. The sharp AI-driven correction has unsettled market sentiment but does not alter our investment outlook. The bond market is signalling easing financial conditions,” Lombard Odier said.

Overall, the bank believes that  theequity market moves look more like a reset in expectations. It expects the narrow AI-led rally to extend beyond a handful of mega-cap stocks to other sectors and regions. “This should leave the long-term case for US equities intact. We see corrections of this magnitude as opportunities to add exposure and have rebalanced our portfolios accordingly,” the bank said.

Meanwhile, Pruksa Iamthongthong, head of APAC equities at Aberdeen Investments, thinks near-term volatility could continue as the market assesses potential delays to US data centre construction and constraints on compute capacity.

Over time, Iamthongthong expects the impact to be manageable. “Structural demand for AI and compute remains strong, even if some investment is delayed. Capacity can also move geographically,” Iamthongthong said. “Hyperscalers are building infrastructure outside the US, which could benefit Asian companies and supply chains that can bring new compute capacity online. China is also developing its own AI ecosystem across chips, data centres, power equipment, software and applications, giving investors another source of AI demand beyond the US.”

“Asia’s investment case is also much broader than AI. Earnings opportunities extend across financials, consumer businesses, healthcare, industrials and domestically-driven companies, while recent corrections have reduced some of the crowding and valuation pressure in technology. 

“There has been heavy selling in this risk-off moment, and we are seeing some stocks correct beyond their expected earnings impact and fundamentals, and therefore, value is starting to emerge. This provides opportunities for active investors like us to buy into or add to quality companies with intact fundamentals at even more attractive valuations,” Iamthongthong said.

Ben Seager-Scott, chief investment officer at Forvis Mazars is also wary of calling this the end of the AI story, since this is about the fifth time in the last 12 months that they have had a sharp fall and each time they have rallied.

"The other point to highlight is that these hyperscalers have actually been lagging the broader market over the last couple of years. For our own stance, we don’t think there is a technology bubble to burst – rather, we think that other stocks will simply outperform as they take advantage of productivity gains. We’ve been moving progressively underweight US mega-cap technology names through this year, favouring instead an equal weighted index that reflects the performance of the average stock in the index," Seager-Scott said.