CLBR

By Jules Rimmer

After the selloff and the election, positioning is cleaner, shorts must be covered and growth is resilient

Data centers like this one under construction in Texas might be threatened by the sudden shift in political control of the state

Sentiment toward AI stocks has been unambiguously negative in recent weeks and the midterm results might suggest to some investors that the sector's worst fears were realized.

However, a Goldman Sachs strategist has a different outlook. AI plays have derated, short positions must now be monetized and the upshot of the elections could be to actually accelerate capital expenditure rather than deter it.

Having witnessed AI stocks being "sold to death," Goldman Sachs' head of European equities trading, Rich Privorotsky, is advising fund managers "the micro remains strong, electoral uncertainty has diminished and positioning looks considerably cleaner."

Much of the investor attention in the runup to Tuesday's vote was focused on whether a Democrat victory would curb the proliferation of data centers. There was particular emphasis on the governor race in Texas where about a quarter of all data centers were planned. The defeat of Republican candidate and incumbent Greg Abbott by Gina Hinojosa implies a potentially more restrictive regulatory environment.

The way that Privorotsky looks at it, though, is that it's possible corporate decision makers may bring forward capital deployment to 2027 to take advantage of current permitting and strategic transactions before the planning regime adjusts. In 2029, a new president might oversee tax changes, more administrative oversight and scrutiny of mergers. Hyperscalers may decide to simply get a move on.

Another point Privorotsky makes is that if the expansion of future compute is constrained, then the value of existing, energized compute rises as a consequence. Theoretically, this benefits the hyperscalers like Amazon (AMZN), Microsoft (MSFT) and Alphabet (GOOG) who already have deployed capacity.

In his trading note dispatched to clients Wednesday, Privorotsky acknowledges that the delay or abandonment of some data centers could slow down what is labelled by investors the picks-and-shovels trade. These are the companies manufacturing semiconductor chips, cooling and electrical equipment and the energy providers.

These sectors have already experienced a correction, though. The Philadelphia Semiconductor Index exchange-traded fund SOX, for instance, has declined by a fifth in the past month.

The note cites AMD's (AMD) excellent third-quarter numbers as evidence of the strength of the AI capex cycle at present. Fourth-quarter guidance was extremely strong, implying another 27% sequential acceleration. The throttling of supply may not destroy demand, Privorotsky asserts, so much as push pricing higher for longer.

It's possible that hyperscalers might have over-ordered relative to their needs if data centers are delayed but still, Privorotsky reckons this has already been reflected in lower valuations. For the neocloud providers like Nebius (NBIS) and CoreWeave (CRWV) the investment conclusion is more nuanced, he writes. Much depends on whether the compute is contracted or existing.

One final point, Privorotsky makes is that he thinks the current levels of volatility, as represented by the so-called fear index, the VIX VIX, may be difficult to sustain, given the election is now over and uncertainty reduced. If as he bets, "vol comes in quickly" then its inverse correlation with stocks implies major indices may trade higher, and AI or AI-adjacent equities make up almost half of those benchmarks.

-Jules Rimmer

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11-04-26 0610ET