Fund managers and investors are advocating caution and more stringent stock selection over the next week, after the Dow Jones Industrial Index and the S&P 500 both slumped more than 3% and 5% respectively overnight on Thursday.
As has been well documented, the fall has primarily been due to fears that a stronger Democrat influence in Washington would be detrimental to the artificial intelligence (AI) boom, particular on data centres, as the "blue party" is seen to exercise heavier priority on environmental constraints, local cost concerns as well as AI safety pauses, while also keeping skepticism of Big Tech over the buildout of the energy-hungry infrastructure AI requires.
Equity analyst at iFast Capital Kevin Khaw sees Thursday’s sell-off primarily as a reassessment of AI growth expectations and valuations, with the election outcome acting as a catalyst through concerns over tighter regulation of data-centre expansion.
"Wednesday’s post-election rally suggests political uncertainty alone is insufficient to explain the reversal, although it would be premature to dismiss the potential policy implications as temporary.
"In our assessment, technology-sector concerns carry greater weight than general political uncertainty, but assigning a precise percentage to either would imply false precision," he explains to Kleverstock.
Within the tech industry, Khaw is favouring established cloud providers with diversified cash flows over financing-dependent neocloud operators, alongside selectively valued fabless chip designers and leading advanced-node foundries.
Nevertheless, he cautions that US–Iran developments and oil prices remain critical, given their implications for inflation, interest rates and risk appetite, emphasising that he sees a period of volatile consolidation ahead as investors reassess political and macroeconomic outlooks.
"Further downside remains possible if earnings expectations weaken. For Bursa Malaysia, we expect the direct earnings impact to be relatively contained, particularly for domestically focused sector such as banks and consumer stocks, whose performance depends more on local credit growth, margins and asset quality," says Khaw.
On the other hand, he acknowledges that global risk aversion could trigger foreign outflows and short-term selling, while technology exporters and businesses exposed to higher energy costs could face greater pressure.
Chief executive at fund management firm Areca Capital Danny Wong says besides post mid-term political uncertainty, concern over US interest rates and questions over AI investment returns and capital expenditure, coupled with profit taking in tech stocks, could also have contributed to Thursday's sell off.
He stresses that Federal Reserve policy expectations will be the main driver for US as well as global markets for short term, judging from employment data and inflation figures.
"We see the overnight sell down more as a market correction rather than the beginning of a prolonged downturn. While we expect continued volatility and some consolidation, although a technical rebound is possible.
"For Bursa Malaysia, the cautious sentiment is weighing on the market as well especially on tech and semiconductor stocks. Overall, we remain cautiously optimistic, with selective buying opportunities emerging as markets stabilise," Wong tells Kleverstock.
2027 could be "bad" year for stocks
Notably, full time, high net worth investor and former investment banker Ian Yoong is not even mincing his words, remarking plainly that 2027 would be a "bad" year for global equities.
He believes that the midterm Democrat electoral landslide is merely the catalyst for the sharp fall over the past two days, with the principal cause of the plunge being soaring bond yields since the middle of the year.
"The most impacted is the tech sector as the trillion dollar capital expenditure needed for AI infrastructure will be greatly impaired. The Democrats are perceived to be less supportive of data centres, and hence there will be obstacles to building more of them. The fire has spread to other sectors too, so stock selection is crucial," he tells Kleverstock.
Of interest, Yoong has predicted two weeks before the midterm elections that a poor showing by the Republicans would result in a drag on AI capital expenditure (capex), which has driven the outperformance of the sector so far.
He had then advocated "keeping one's powder dry", noting that "not investing is also an investment decision".
"My strategy moving forward is to build up cash, about 30%0-40% of cash reserves, in anticipation of a decline in equity prices in spite of the super positive forecasts of industry insiders, analysts and fund managers. If everybody is thinking the same, then someone isn’t thinking," says Yoong.