Yesterday:

The sell-off swept 428 of the 503 stocks in the constituent screen lower against 75 gainers; 109 fell at least 5% and 39 fell at least 10%.

The damage concentrated in artificial-intelligence hardware: Lumentum (LITE) fell 18.6%, Advanced Micro Devices (AMD) 17.6%, Lam Research (LRCX) 16.5%, Marvell Technology (MRVL) 16.4%, Ciena (CIEN) 15.3%, Teradyne (TER) 15.3%, Dell Technologies (DELL) 14.9%, Vertiv (VRT) 14.0%, Microchip Technology (MCHP) 13.9%, Flex (FLEX) 13.6%, Applied Materials (AMAT) 13.5%, KLA (KLAC) 13.4%, Coherent (COHR) 13.0%, Corning (GLW) 12.9%, Quanta Services (PWR) 12.3%, Hewlett Packard Enterprise (HPE) 11.9%, ON Semiconductor (ON) 11.6%, Comfort Systems USA (FIX) 11.6%, Analog Devices (ADI) 11.2%, Broadcom (AVGO) 10.4% and Nvidia (NVDA) 9.1%. Tesla (TSLA) fell 10.8%.

Memory-chip makers took the heaviest losses: SanDisk (SNDK) fell 22.2%, Western Digital (WDC) 17.4%, Micron Technology (MU) 17.2% and Seagate Technology (STX) 16.3%, as the industry’s shortages rippled through customers’ production plans, Investor’s Business Daily reported; Qualcomm (QCOM) fell 9.5% after saying the memory shortage is hurting sales of its smartphone chips. Power and construction names tied to the data-center build-out fell with it: Bloom Energy (BE) lost 16.4% and Everpure (P) fell 16.4%. (rockandturner@substack.com)

From Ed Yardeni at yesterday’s close:

Politics Shakes Up the Markets

The WSJ Editorial Board:

(…) On Wednesday investors bid up stocks on seeming hope that political gridlock in Washington might be good for the economy. On Thursday they noticed Democratic control of so many state governments, and towering majorities in Congress, might not be great for business, especially tech. Investors have to figure out where to land after such a seismic election with uncertain policy consequences.

Notably, Thursday’s selloff spread beyond tech, marking the first time in months that every sector represented in the S&P 500 index declined. And steeply so, this time. Consumer stocks that previously became a refuge for investors taking tech-stock profits also fell.

This could mark merely another painful step in the repricing of financial risks. Or it could signal a new degree of liquidity stress in the market as investors sell to take profits and raise cash to hedge against what they see as new political and economic risks.

None of this is a counsel of panic, especially given tech stocks’ propensity for volatility. But it’s a warning to Washington: While many corners of the American economy have performed well lately, a wealth effect from steadily rising asset prices has been a cornerstone of consumer spending.

A sustained tech or stock-market correction, if one comes, could leave Washington searching for other ways to bolster economic growth.

Republicans may think they can spend the next two years fighting over the Iran war. Democrats hope to use their time passing big entitlement legislation such as Medicare for All, raising taxes, and investigating President Trump. They’re both on notice that sometimes market events have other ideas.

Ed Yardeni:

We view the political backlash as another constraint on AI investment, alongside financial and physical bottlenecks. But these are speed bumps, not roadblocks, even though Wall Street seems to be pricing in the latter. We think that’s overdone.

As AI adoption broadens and productivity gains accelerate, demand for compute will keep growing. Data centers will get built, albeit at a slower pace. Speed bumps should prevent the AI boom from moving too fast and crashing around the next curve.

Iran is Reviewing ‘Concrete Proposals’ on Nuclear Program, Officials Say

Iran is reviewing a set of proposals presented by mediators that could shape the future of its nuclear program, according to five officials briefed on the negotiations, representing a potential breakthrough in stalled diplomatic efforts to end its war with the United States.

Iran’s willingness to re-engage in nuclear talks, after weeks of refusing to budge, suggests recent mediation efforts led by Qatar to prevent a return to full-blown war have had some success, the officials said. They described the terms being reviewed as “concrete proposals,” without elaborating. (…)

Mr. Rezaei suggested in a televised address on Saturday that Iran would not hold nuclear talks until the United States accepted the country’s demands. Those include releasing frozen Iranian assets, and lifting sanctions on the country’s oil and the U.S. naval blockade on Iran’s ports.

Privately, however, Mr. Rezaei has shown more openness to discussing the nuclear issue, according to the two Iranian officials and the American official. He has been negotiating with the Qataris alongside senior Iranian officials, including Abbas Araghchi, the foreign minister, and Mohammad Bagher Ghalibaf, the speaker of Iran’s Parliament.

The future of Iran’s stockpile of highly enriched uranium has been one of the key sticking points in the talks. (…)

Iranian officials have been adamant that they will not ship the uranium outside the country. In previous rounds of talks, Iran has discussed diluting the stockpile on its own soil under the supervision of international inspectors. (…)

As of Thursday morning, Iran and the United States were reviewing the latest suggestions from mediators to bridge any remaining gaps, two of the officials said. (…)

“From the perspective of the U.A.E., and I would also say Gulf countries, we don’t really want to see another round of confrontation in the region,” said Anwar Gargash, a diplomatic adviser to the president of the United Arab Emirates, at the Manama Dialogue security conference in Bahrain over the weekend. “We want to see a diplomatic and political resolution of this protracted crisis.”

• Why is Iran exempting India, China, Qatar, Iraq from Hormuz restrictions?

Iran has exempted ships from India, China, Iraq and Qatar from its Strait of Hormuz restrictions, a senior Iranian lawmaker said on Tuesday.

“Ships from these countries pass freely, and the Americans do not intercept them either,” Amir Hayat Moqaddam, deputy chairman of the Iranian parliament’s National Security and Foreign Policy Committee, told the Iranian Students’ News Agency (ISNA). (…)

What does Iran get in return for letting ships pass?

It will receive medicine from India and political backing from China, according to Hayat Moqaddam. Iran already receives diplomatic support from Qatar, which is leading mediation efforts to end the US-Israel war on Iran.

Hayat Moqaddam said Tehran will also collect transit fees from Indian and Chinese ships, while Qatari vessels pass free. He did not say whether Iraqi ships will pay a toll.

“If successful, this move will generate significant revenue for Iran, as China is by far the largest purchaser of Iranian crude oil, buying nearly 90 percent of Iran’s total oil exports,” he said.

By including Qatar, with its many liquefied natural gas (LNG) buyers, and India, Iran is also “trying to undermine acceptance” of Washington’s strategy in the conflict, especially as it charges Qatar no tolls, he added. (…)

Of the 10.23 million barrels a day of Gulf crude that passed through the strait in October, about 42 percent went to China and 13 percent to India, Muyu Xu, a senior crude oil analyst at the analytics firm Kpler, told Al Jazeera. (…)

US Labor Productivity Increases at Fastest Pace in a Year

Productivity, or nonfarm business output per hour, increased at a 3.6% annualized rate after an upwardly revised 2.1% pace in the prior quarter, data from the Bureau of Labor Statistics showed Thursday.

Unit labor costs — what businesses pay employees to produce one unit of output — fell 0.7%, the first decline since the second quarter of 2025. (…)

Hours worked rose 0.1%, while hourly compensation, unadjusted for inflation, increased an annualized 2.9%. After adjusting for inflation, worker compensation rose 1.1%.

The labor share of income, the portion of output that goes to workers in the form of compensation, was 53% in the third quarter of 2026, the lowest level in data back to 1947.

Separate figures out Thursday from Challenger, Gray & Christmas showed layoff announcements were the lowest for any October in three years.

• A Phenomenon: Initial Applications for Unemployment Benefits (4-Week Average) Drop to the Lowest since 1969

The four-week average of initial applications for unemployment insurance benefits fell to 194,700, the lowest since 1969, according to the Labor Department today. For just the week through Saturday, initial applications for unemployment benefits fell to 189,000, same as in mid-July, and both were the lowest since 1969.

But the population, the labor force, and employment are vastly bigger now than in the 1960s. So these initial applications, historically low in absolute terms, are amazingly low in relative terms. (…)

Zillow October Market Report

Existing home sales fell 8.7% year over year, though that largely reflects sales agreed to in September, when mortgage rates were below 7% for much of the month. Newly pending listings, a leading indicator for the next month’s closed sales, fell 16.8% from last October, marking the biggest annual dip since August 2023 and slowest October since 2018. 

November is shaping up to have an even larger contraction in sales activity (…).

A jump in housing costs likely drove the slowdown. The monthly mortgage payment on the typical U.S. home was an estimated $2,004 in October, assuming a 20% down payment and excluding taxes and insurance. That’s up 12.8% from last year and 4.8% higher than in September, the biggest one-month jump in four years. (…)

The rise in mortgage costs is almost exclusively due to higher mortgage rates. The typical U.S. home value fell 0.6% month over month and is just 0.7% higher than a year earlier, as measured by the Zillow Home Value Index. (…)

The typical U.S. rent is up 2.9% year over year, according to the Zillow Observed Rent Index. That’s the strongest annual gain in the past 19 months, and marks the seventh consecutive month that annual rent growth has increased.  (…)

• Active inventory was 3.4% higher than a year earlier.
• New for-sale listings totaled 328,328 in October, down 4.2% from a year earlier and down 4.4% from September.
• Rents are expected to grow 2.4% in multifamily and 3.2% in single-family in the fourth quarter.

AI Companies Scramble to Navigate a World Hostile to Data Centers

(…) Overnight, they found themselves facing the prospect of blanket moratoriums, tighter environmental regulations and longer review timelines, along with potential new AI-safety regulations that could further bog them down.

The tech investor Brad Gerstner said on the “All-In” podcast that as much as 35% of the U.S. data-center construction planned for next year is now at risk.

Executives in charge of government relations for so-called hyperscaler companies moved quickly to open lines of communication with incoming governors and their transition teams, seeking an understanding of how their campaign-trail rhetoric would translate into policy actions.

Dina Powell McCormick, who as president of Meta Platforms oversees its AI-infrastructure operations, said at the WSJ Tech conference Wednesday night that the company had already found one incoming governor prepared to parley.

“We did have a governor that won last night who did make data centers a big part of their platform say, ‘As soon as we get past the inauguration, let’s meet, because we don’t want to lose this investment in our town. We don’t want these jobs to go elsewhere,’ ” she said.

But on the whole, Powell McCormick said, Meta assumes that building data centers in the U.S. is “going to be harder” and getting new ones done from scratch will be “very challenging.”

She said Meta and other tech companies are increasingly considering building new data centers outside the U.S. as one way around the new hurdles. Another avenue, she said, is to scale up existing data centers, where surrounding communities that have seen benefits in the form of job creation and tax revenue don’t require as much persuasion. (…)

Anthropic said it was pursuing projects in several “non-U.S. jurisdictions” as part of a plan to “reduce concentration risks associated with operating a significant portion of our compute infrastructure in the United States.” (…)

Bloomberg:

(…) Dan Diorio, executive vice president of state policy and government affairs for the Data Center Coalition, an industry alliance, said communities that prohibit data centers risk seeing investment, jobs and tax revenue move elsewhere.

“That’s going to go to other communities that have not shut themselves off,” Diorio said, “or to states that have not shut themselves off.” (…)

Tuesday’s results stand to shrink the $1.4 trillion that technology companies were expected to spend on AI infrastructure by roughly 5% to 7% in 2027, according to Bloomberg Intelligence technology analyst Mandeep Singh. That includes spending on chips, networking equipment, land and other materials for data center construction.

Those cuts and the anticipated slowdown in approvals may translate into as many as 10 gigawatts of data center capacity failing to come online next year as planned, Singh said. (…)

Nearly three in four Americans now oppose a data center in their community, up from about two-thirds in March, according to a September Quinnipiac poll. An October poll from Ohio Northern University found that 57% of respondents in the state would vote “yes” on a total ban on large-scale data centers.

Nearly half of the country’s 46 ballot measures to restrict data center construction were in Ohio and nearly all of them passed easily. Some rejected specific projects, such as EdgeConneX’s complex in Ashville, or required financial guarantees, while others set limits on data center power and water use; some 11 Ohio towns passed total or near-bans. (…)

Ahead of the election, [Ohio Governor-elect Amy] Acton’s stump mantra was: “Ohio is open for business, but we are not up for sale.” (…)

“We expect to see a lot more sand in the gears of the AI build-out regardless — with more time required to secure permits and other approvals, as well as more concessions that data center developers will have to make,” said Libby Cantrill, PIMCO’s head of public policy.

Incoming governors in Iowa and Nevada pledged to stop AI tax breaks. Byron Donalds, the next governor of Florida, has promised a measure that would require data centers to source their own electricity, rather than plugging into the grid. (…)

Texas Governor-elect Gina Hinojosa was interviewed after the market closed on CNN and said, “All currently permitted data centers in Texas will be allowed to finish construction.” This essentially covers all of 2027 and likely most of 2028.

IRAN

Trump met with his national security advisers to discuss Iran on Thursday as part of his weekly intelligence meeting, Axios reported, citing two unnamed US officials. He is considering three options: continuing efforts to hobble Tehran economically, or cutting a deal that includes significant concessions to the Iranians, according to the report.

Gridlock Won & Markets Cheer

Ed Yardeni sums up yesterday’s sentiment pretty well:

Financial markets put a positive spin on the blue wave.

Oil prices fell on hopes that the US and Iran are more likely now to resolve their war diplomatically. If so, then the outlook for inflation will improve. So the Fed might not have to raise the federal funds rate as much.

The federal deficit might not widen further if Democrats refuse to increase defense spending, while President Donald Trump vetoes their attempts to provide Medicare for all.

If Democrats slow the AI buildout, hyperscalers’ profits and free cash flow will increase. Fewer AI-related bond issues would also help keep a lid on bond yields. (…)

Investors may be warming up to the idea that some constraints on the AI buildout could be healthy, as we have been arguing recently. Democratic victories in key data center states, including Texas and Georgia, raise the prospect of tighter construction restrictions amid concerns about electricity and water consumption.

Hyperscalers rallied today, with Amazon and Microsoft gaining more than 6%, as capital discipline could ease concerns about AI investment returns and improve free cash flow.

AI infrastructure providers struggled, however. The PHLX Semiconductor Index fell 3.1% amid fears of weaker demand from a slower buildout. We may be entering an AI Goldilocks zone, with enough restraint to take some air out of the bubble without derailing the boom.

This also helped:

“What lifts the green bar is that nothing passes, and a Democratic Congress facing a president with a veto delivers exactly that.” (@AndreasSteno)

• The Election Day Revolt That Threatens America’s AI Boom Americans’ vote for anti-data center candidates and ballot measures could rein in AI’s expansion and hobble economic growth

(…) By Wednesday morning, senior leaders at OpenAI were discussing whether the results meant the company would have to reset expectations regarding its data center capacity next year, according to a person familiar with the conversation.

Americans’ vote for candidates and ballot measures to ban or slow data center development could rein in AI’s rapid growth and become a big business problem for the companies on the edge of technological progress. It also threatens to hobble an AI boom powering the U.S. economy. (…)

Texas, Georgia and Ohio account for more than 40% of all planned data center capacity in the U.S., according to investment bank Evercore ISI. (…)

“This is going to probably elongate the timelines for the data-center build-outs,” Sequoia Capital partner Pat Grady said at the WSJ Tech conference Wednesday. (…)

AI investment is projected to account for 1.9% of gross domestic product this year, according to Goldman Sachs, the biggest share of economic growth for the build out of a new industry since the railroad boom in the 19th century.

(…) roughly 25% to 35% of next year’s data-center build-out in the U.S. could be at risk. (…)

About 56% of voters nationally said data centers were a crucial or major factor in their picks for Congress, according to a national survey conducted by polling firm SSRS. (…)

A decline in new data centers would likely slow down overall construction employment, at a time when building other types of commercial real estate, such as apartments and office buildings, is contracting.  (…)

• The Blue Wave Sets Off a Potential Regime Change in Markets 

(…) if Wednesday’s broad rally is any indication, Wall Street is betting on a more-predictable, more-“ real” economy in the final years of Trump’s term. (…)

Banks, home builders, carmakers and major retailers ranging from Dollar Tree to Walmart all gained.

“The AI trade was taking up all the oxygen in the economy,” said Michael Antonelli, a market strategist for Baird Private Wealth Management. A slowdown in the data center construction boom “allows the economy to allocate money to other sectors.” (…)

After Vance said on social media that “the reason we lost is the war,” Brent crude-oil futures plunged by 8.7%, to $94.62 a barrel, an apparent sign that traders are dialing back bets on renewed fighting. Government bond yields ticked lower.

Defense contractors RTX, Lockheed Martin and Northrop Grumman also fell. A divided government could make it harder to approve military spending. (…)

We can wonder what the economy/inflation/equity markets would be like without AI and the wars but the reality is that:

• defense spending across the world will not suddenly stop. The US umbrella is gone.
• the AI race will not stop either, not only between OpenAI and Anthropic and others but crucially between the US and China.
• the corporate races to best AI applications is also totally on. This is about competitiveness on products and costs.
• the US elections were not a referendum on AI but on unbridled data center buildout.

Goldman Sachs:

On AI and data center regulation, Democratic wins at the state and local level are likely to have significant implications. Republicans lost the gubernatorial elections in Texas, Ohio, Nevada, Georgia, and Michigan, and Democrats gained a trifecta in Pennsylvania and likely in Arizona as well.

In each of these states except Ohio, the Democratic side explicitly campaigned on stricter data center regulation, stricter data center regulation, and we expect Democratic governors in Texas, Georgia, and Michigan to impose conditional moratoria pending new legislation restricting data centers.

That legislation could end certain tax breaks (a priority for Hinojosa), tighten environmental, water, and electricity rules, and make it easier for localities to impose their own moratoria.

The states where Democrats are likely to further restrict data centers account for roughly 45% of planned US data center capacity, with Texas alone accounting for roughly 25%.

However, since data centers are low on the list of priorities for voters this election, we expect that the issue will fade somewhat in importance in the ensuing months and that these moratoria will not be long-lived if they are enacted.

Demand for compute will keep rising fast and so will competition for data centers.

The elections will accelerate changes already underway towards more rules and a reasonable, pragmatic bargain between data center builders and communities.

In Texas, James Talarico won the the Senate. His victory email made no mention of AI or data centers. But the bigger AI story in Texas was Gina Hinojosa beating Governor Greg Abbott. Hinojosa ran on a moratorium until rules are written, an end to a “corruption tax of subsidies, and protecting local power and water”.

After her victory, Hinojosa said “I don’t hate data centers. I just hate the way they’re taking advantage of Texans,”, leaving good political space for new rules.

The data center industry should rapidly set acceptable standards and/or find new locations.

A significant slowdown in compute supply growth would be disastrous for the US, the US economy and US financial markets.

Morgan Stanley wrote “Democratic victories in state elections, particularly in Texas, could lead to tighter data center restrictions and project delays, although the broader AI investment cycle is expected to stay the same.” Unfortunately, you can’t have “the same AI investment cycle” with data center project delays.

FYI: ChatGPT users went from 1.0 billion to 1.2 billion weekly users with more than 250 million people using its voice features every week. That requires a lot of compute.

From a Deloitte survey released October 29:

• AI is delivering on its promise of speed, with 81% of companies surveyed reporting faster decision-making and execution. 25% say they are using AI to deeply transform the business by creating new products or services, reinventing core processes, or fundamentally changing their business models.
• AI is starting to act, not just advise. Forty percent of enterprises surveyed now allow AI systems to execute decisions or take actions without human approval, at least to a moderate degree, while nearly 1 in 4 state that accountability is unclear when AI produces a negative outcome, making AI safety and governance a growing priority.
• Return on investment (ROI) is expanding beyond productivity, with reported revenue gains from AI increasing to 28% (up from 20% reported in Deloitte’s January report), demonstrating that financial value is solidifying for enterprises. Those companies are also seeing broader benefits beyond productivity and cost savings, suggesting payoff comes not just from moving faster, but working smarter.

More examples that non-AI businesses are slowing:

Qualcomm Slides After Supply Costs Take a Bite Out of Profit

Earnings will be $2.15 to $2.35 a share in the three months ending in December, the company said in a statement Wednesday. The midpoint of that range fell short of the $2.32 estimated by analysts on average, according to data compiled by Bloomberg.

In delivering the forecast, Qualcomm cited a “broad-based increase” in costs for components and manufacturing. Like many chipmakers, the company is dealing with higher expenses caused by shortages in its own supply chain and a dearth of memory chips — largely fueled by the surge in demand for data center equipment. Qualcomm is raising its own prices to cope with the crunch. (…)

Qualcomm’s sales fell 8% to $10.3 billion in the fiscal fourth quarter, which ended Sept. 27. (…) For now, the phone market remains a burden on Qualcomm’s results. Revenue from the segment tumbled 26% last quarter to $5.14 billion. (…)

Arm Holdings Plc, another chip company heavily reliant on the smartphone market, delivered its own mixed results on Wednesday.

Both companies expect the smartphone industry’s shipments to flatten out next year.

Sales at AMD’s data center business nearly doubled to $8.5 billion. Analysts had predicted a total of $8.2 billion. PC and gaming-related sales shrank 8% to $3.7 billion.

US SERVICES PMIs

S&P Global: Strong demand supports further expansion of service sector,but elevated inflationary pressures weigh on outlook

The headline S&P Global US Services PMI^® Business Activity Index remained comfortably above the critical 50.0 no-change mark in October. Although lower than September’s recent high of 58.8 and revised down from the earlier ‘flash’ reading, at 56.1 the index signaled a strong rate of growth that was comfortably above the survey average.

(…) Despite reported headwinds of elevated inflation, high interest rates and associated market volatility, new business inflows rose sharply. Demand was reported to be high, and pipelines of new work were positive with some success converting enquiries into hard contract wins. There was also a net increase in new export business for a third successive month, with growth the best since mid-2023. (…)

Jobs growth was solid, despite being down on September’s 51-month peak and the lowest since July. Companies were keen to expand employment to help support new business and as part of company expansion plans.

However, present capacity was insufficient to keep on top of overall workloads, with backlogs of work rising steeply and to the greatest degree in four-and-a-half years. (…)

An additional challenge facing service providers was another steep increase in input prices. Although easing on September’s near-four-year peak, the rate of inflation was higher than the average for 2026 so far. Companies reported that operating expenses were being driven up by higher fuel prices, which raised prices for a wide range of other goods and services, especially food and associated transportation services. In response to the latest round of increased operating costs, service providers raised their own charges to the greatest degree since July.

Inflation and its impact on client budgets, plus some uncertainty regarding the future path of federal government policies, weighed on service providers’ confidence in October. Although companies expect a strong underlying economy, plus their own plans for greater marketing and company expansion to support growth in the year ahead, sentiment was overall at its lowest since May and was again notably below its typical level.

S&P Global US Composite PMI^®

The US Composite PMI remained comfortably above the critical 50.0 no-change mark in October to signal another month of private sector output growth.

That said, amid weaker gains in both manufacturing production and service sector activity, the index fell to 55.9, from 58.4 in September – the lowest in three months.

Private sector new business continued to rise sharply, underpinned by a strong contribution again from services, whilst jobs growth overall remained positive. Cost pressures remained elevated, despite softening since September. Output charges meanwhile rose to the greatest degree since August 2022.

Canada, China Extend Tariff Deal, Aim to Boost Canadian Exports

Canada and China extended a deal to lower Beijing’s agricultural tariffs through the end of 2028, while pledging to continue discussions on boosting Canadian exports to the Asian superpower.

The countries agreed to the extension at a meeting in Beijing co-led by China’s Commerce Minister Wang Wentao, Canadian International Trade Minister Maninder Sidhu said in a news release on Wednesday. (…)

Also, Carney’s office said he’ll travel to China for the APEC meeting in the southern city of Shenzhen that is set for Nov. 18–19. His trip will also take him to Ireland, the Philippines and Cambodia.

The extension means Canadian canola meal, peas, lobsters and crab will face lower Chinese tariffs for another two years. China also restored market access for Canadian beef during Carney’s January visit.

Canada will extend to the end of 2028 certain remission measures — essentially tariff waivers for importers — for Chinese steel and aluminum products not made in Canada. In January, Canada also agreed to import a quota of Chinese electric vehicles at a reduced tariff rate.

“Canada will continue discussions with China to identify opportunities to deliver on the government’s target of increasing Canadian exports by 50% to China,” the government said in the release. (…)