Midterm Results Could Deepen the Split in AI Infrastructure Stocks

The U.S. midterms may sharpen the divide in the AI trade, with stricter data center rules potentially favoring tech giants that already hold capacity while pressuring debt-funded challengers.

Democratic wins in key gubernatorial races raised the prospect of tougher scrutiny for data center projects, adding to investor worries about how quickly new capacity can be built and financed. In Texas, Democratic governor-elect Gina Hinojosa has proposed a statewide moratorium on new data center permits, though projects already under construction would reportedly be exempt.

As markets digested the results Wednesday, Microsoft and Amazon each surged more than 6%, while AI infrastructure provider CoreWeave plunged around 10%. Chipmakers Micron and Nvidia fell 7% and 3.17%, respectively.

Borrowing costs are driving the split, James Sullivan, managing director and co-head of global fundamental research at JPMorgan, told CNBC's "Squawk Box Asia" on Thursday. He said spreads have widened significantly for neocloud companies, leaving their cost of additional capital substantially higher than that of hyperscalers with more diversified customers and revenue. "The fact that you're seeing this bifurcation in equity performance is largely driven by the view that existing capacity is significantly more valuable now because of incremental supply constraints," he said.

BMI warned that a sharp slowdown in data center construction and AI investment could produce a greater-than-expected decline in overall investment, The Business Times reported, citing the firm's post-midterm analysis.

The impact is uneven across the construction pipeline. Much of the capacity expected in 2027 is already under construction, limiting near-term effects of new restrictions. Projects planned for 2028 face greater exposure to permitting delays and regulatory uncertainty, Nomura said in a Wednesday note, adding that tighter rules could become a more significant headwind to AI investment from 2028.

Shares of Nvidia-backed neoclouds CoreWeave, Nebius and Iren fell at least 30% in October as tightening credit markets raised questions about financing AI infrastructure. CoreWeave's five-year credit default swap spread has surged past 1,100 basis points.

JPMorgan Asset Management said in an Oct. 20 research note that hyperscalers have broader cloud businesses and more internally generated cash flow, while lower-rated neoclouds face greater exposure to borrowing costs, energy prices and refinancing conditions. The asset manager said financially stronger hyperscalers could also secure cheaper capacity or acquire assets if weaker operators scale back.

Source: CNBC