Morgan Stanley and UBS Say AI Sell-Off Is Overdone, Play Down Democrat Regulation Risk

The calls follow a sharp selloff in the AI trade. On November 5, after Democrats swept the midterm elections, fears of tougher rules on AI and data centres triggered a sector-wide rout. Nvidia fell as much as 9.3% to $181.60 that day, its worst session since January 2025, Gulf News reported. In Texas, governor-elect Gina Hinojosa, who defeated Republican Greg Abbott, has pledged to halt approvals for new data centres. For investors who have priced AI infrastructure on years of uninterrupted capital spending, the question is whether the election changes that path or only its timing.

Morgan Stanley's answer is that it changes the timing. The bank argued that the main effect of new regulation would be to push some data centre projects from 2028 into 2029, not to derail the industry's capital spending plans. It also said a longer investment cycle could help in some ways, by easing the balance between supply and demand for computing capacity, improving the credit outlook for borrowers and lifting lease rates for compute. The firm recommended "buying the drop" and kept its positive view on Amazon, Meta and Alphabet. It also sees opportunities in Nvidia, Broadcom, Seagate, Western Digital, Coherent and Lumentum.

UBS analysts said markets had become too negative on three fronts: the political risk to AI, the credit risk tied to AI borrowing, and the outlook for AI spending.

At Jefferies, analyst Jane Gibbons called the November 5 selloff "reactionary" and said it did not amount to a fundamental reset. She pointed to history: daily declines of more than 4% in the S&P 500 have been followed by average gains of 11.9% over the next six months and more than 20% over the next 12 months.

HSBC said it was using the correction to add equity exposure, favouring US and Asian technology stocks. It named Anthropic's planned initial public offering as the main catalyst for the sector in the coming weeks.

The brokerages' optimism runs into some problems that are specific to Nvidia. The chipmaker's board has opened an independent inquiry into reports that chief executive Jensen Huang was targeted by Chinese intelligence, after Huang admitted to employees that he had an affair with a suspected spy. Nvidia shares fell as much as 4.2% in overnight trading after that disclosure. Before it, the stock had already posted five straight weekly losses from a $233.95 close on October 2, according to Gulf News.

Not all investors share the brokerages' view. Some market commentary since the election has said that uncertainty over how AI and the data centre build-out will be regulated is keeping buyers away, even at lower prices.

The next test is Nvidia's quarterly report, due after the market closes on November 17. Analysts expect it to show a rise of more than 12% in data centre revenue from the previous quarter, and Gulf News reported that analysts also expect pointed questions about the board's investigation on the call.