With one day to go before the U.S. midterm elections, Asian markets are reacting sensitively to concerns over financing for artificial intelligence (AI). South Korea's KOSPI closed down 3.59% at 5,648.79, while the tech-heavy KOSDAQ fell 4.08% to 704.39. Foreign investors net sold 1.5154 trillion won (approximately $1.1 billion) in the main KOSPI market, and Samsung Electronics and SK Hynix dropped 4.15% and 5.03%, respectively.
The selloff followed a string of large-scale fundraising announcements by U.S. big tech companies, which revived doubts about the profitability of AI investment. Jitters that the midterm results could shift the direction of AI regulation added to the pressure. The U.S. Democratic Party has maintained that the pace of AI development should be moderated until safety is assured and that environmental regulation on data center construction should be tightened.
In a report the previous day, KB Securities identified the Fed's read on the economy, market expectations for a monetary policy pivot, and the actual impact of AI regulation on investment as the variables that will shape the market's course after the midterms. The analysis suggests that how much policy changes alter corporate investment and growth matters more than which party controls Congress.
The case the market is using for comparison is the 2018 midterms during Trump's first term. At the time, Republicans held the Senate majority but lost the House to the Democrats. The Nasdaq, which had been falling since October, extended its losses after the election and was down 23% from its peak by December 24. KB Securities traced the core cause of that plunge to monetary policy rather than the election outcome. The Fed acknowledged signs of an economic slowdown but kept a December rate hike and the possibility of further increases on the table, dashing market expectations, the report explained.
Note: 2018 figures based on the KB Securities report and market data
This time, however, the level of expectations around monetary policy differs from 2018, according to the analysis. KB Securities sees a high likelihood of a December rate hike but noted that with a consensus that inflation will remain elevated into early next year, the market is not anticipating a rapid change in the Fed's stance. With expectations for a policy pivot low, any additional shock from disappointment could be relatively small.
Some also argue that even if the Democrats gain the upper hand in Congress, it is a separate question whether regulation would immediately lead to a cutback in AI investment. Discussions over data centers' power consumption and electricity cost burdens could take shape as adjustments to how costs are shared rather than as investment restrictions. "It is hard to conclude that regulation will immediately translate into a contraction in AI investment," said Kim Se-rin, a researcher at KB Securities. "The hardline stance right after the election will likely find a balance over time, for instance by having data centers bear electricity costs."
Conversely, if Republicans win, President Trump's policy direction would continue and investment, including in AI, would be sustained, potentially benefiting exports and production. However, stronger tariff pressure and a widening U.S. fiscal deficit that could roil interest rates and exchange rates are cited as burdens.
The possibility of an AI investment pullback remains a source of caution. "Given that AI CAPEX accounts for more than 30% of U.S. GDP growth, a contraction in investment would likely lead to slower growth and reduced demand for capital, making it a clear downside risk if it materializes," said Kim Min-kyu, a researcher at KB Securities. Still, the election is seen as unlikely to significantly alter the growth outlook for the AI industry itself.
"The short-term noise right after the election is unavoidable," Kim Min-kyu said, "but with the possibility of a Fed-driven shock that turns that noise into a sharp selloff low, I expect a year-end that is less turbulent than 2018."
