Traders expecting the US midterm elections to act as a clearing event for stocks may run into an artificial intelligence "wall of worry" that keeps the market from moving higher, according to Wolfe Research. With investors now focused on the AI buildout, the trade around the technology has become a "show me" story, and the midterms, likely the biggest catalyst for stocks this week, may not be enough to change that.
Wolfe strategists led by Chris Senyek wrote in a note published Monday that the trade is now driven by technical factors, including signs of a wash-out as investors lock in gains for the year. Last week the Nasdaq 100 Index slumped about 2%, dragged by disappointing earnings from Alphabet Inc. and Amazon.com Inc. Senyek expects stocks to remain rangebound as traders assess mixed results from hyperscalers. Nvidia Corp.'s earnings report on Nov. 17 will "be critical" for the AI trade to regain favor.
Senyek noted that the latest hyperscaler developments haven't been entirely bad. Anthropic PBC releasing its S-1 filing, solid results from Microsoft Corp. and Oracle Corp.'s positive analyst day were overshadowed by Alphabet and Amazon. Still, the equity selloff paused Monday as traders turned to diplomatic efforts to end the Middle East war, which pushed oil prices lower and eased inflation concerns. Whether US President Donald Trump ramps up pressure on Iran after the midterms is the "largest macro wildcard on the horizon," Senyek said.
US stocks have traded higher six and 12 months after every midterm vote since 1950, according to Morgan Stanley data. Senyek expects the market to rise through year-end as long as oil prices remain stable and Nvidia earnings and Anthropic's upcoming initial public offering prove to be positive catalysts. Morgan Stanley's Mike Wilson said Monday that the correction that began several months ago is in its final stage.
Source: Bloomberg Markets · Summarized by HeadlinesBriefing