Chip stocks fell 12% in a day and the Nasdaq entered a correction. What happened

What happened

US shares had one of their worst days in years on Thursday 5 November. The S&P 500 fell 4.4%, its biggest drop since April 2025, and the Dow lost about 1,830 points, giving back its gain from the day after the midterms. The Nasdaq fell 5.5% and closed more than 10% below its record from last month, the usual definition of a correction.

Chipmakers led the fall. The Philadelphia Semiconductor Index lost 12.3%. Micron and AMD each fell more than 17%, Broadcom 10% and Nvidia 9%, which left Nvidia below its price at the start of the year. The VIX, an index of expected volatility often called Wall Street's fear gauge, jumped to about 28 from 17, its highest since March.

What triggered it

Several things came together. After Democrats won control of Congress, some investors worried about tougher scrutiny of AI data centres, which face growing local opposition in several states; UBS strategists estimated that about 30% of the data-centre capacity expected in 2028 is now at risk. At the same time, hedge funds sold the year's best performers to lock in gains before year-end. "They're shooting the generals," wrote Charlie McElligott of Nomura, who said profit-taking, not weaker business results, was the main driver. Individual investors also sold heavily: Vanda Research said they were on track for their biggest day of net selling since March 2020.

Why a few stocks can pull down the whole market

This year's rally was led by a small group of AI and chip companies, which now make up a large share of the main indices. When many investors hold the same winners, a reason to sell spreads quickly: falling prices trigger risk limits and margin calls, which force more selling. Funds that track indices then have to sell too. That is how a sell-off in one sector became a broad fall, with all 11 sectors of the S&P 500 lower by the afternoon.

The effects reach beyond Wall Street. Chips were almost half of South Korea's exports in October, and AI spending has been one of the main drivers of US growth this year.

Where it sits in the chain

This is Link 4, financial markets. In a scare, investors move to safety: the US 10-year Treasury yield fell to about 4.84%, and futures cut the probability of a Fed rate rise in December to about 70%, from 83% a day earlier, according to CME FedWatch data. If falling share prices make companies and households spend less, the effect reaches the real economy (Link 5).

What to watch

• How Asian chip stocks, especially in Korea and Taiwan, react on Friday.
• The US jobs report on 6 November.
• Any guidance from big technology companies on their AI spending plans.