NEW YORK: A slew of Wall Street strategists were banking on a short-term selloff following the US midterm elections to give investors an opportunity to buy stocks at a discount.
Last Thursday, they got far more than they bargained for. And now they’re urging their clients to take advantage.
“This is the place where you should be adding risk over the next two to three weeks,” said Mike Wilson, chief US equity strategist at Morgan Stanley.
Wilson was just as surprised as everyone else at the severity of the selling last Thursday that sent the S&P 500 Index down 4.4% and the Nasdaq 100 Index tumbling 6.4% due to concerns that newly empowered Democrats will slow the artificial intelligence (AI) buildout.
Still, Wilson is confident that US stocks are poised for a rally, and he’s sticking to his target for the S&P 500 to reach 8,000 by the end of the year, which would imply a gain of 8.4% from last Friday’s close.
Investors waded back into the market last Friday, sending the S&P 500 up 0.3%. But the benchmark is still down 2.5% since polls closed last Tuesday.
Democrats won control of the Senate and House of Representatives, as well as numerous state houses and governor’s mansions throughout the country.
Many of the winning candidates pledged to check data centre development and increase regulation.
The wipeout is evidence that the selloff in the S&P 500 in recent weeks is nearing an end, not a sign that the AI trade is collapsing, which would signal more pain ahead, Wilson and many of his Wall Street colleagues argue.
“We have had an AI bubble and I think the air is coming out of that bubble,” Ed Yardeni, chief investment strategist at Yardeni Research, said in an interview last Thursday.
“Bursting would mean that it would have significant adverse impacts on the economy, and I don’t see that happening.”
Wilson is recommending investors scoop up shares of consumer-focused stocks, particularly if interest rates and oil prices keep falling, while Yardeni likes healthcare stocks.
“I view it as a correction,” said Yardeni, who has a year-end S&P 500 target of 7,900.
“I anticipated buying opportunities after the elections, and I think we’re starting to see some pretty good ones.”
Caught off guard
Many Wall Street trading desks were caught off guard by last Thursday’s rout after telling clients to pile back into the market after the election. The S&P 500 rose 1.6% last Wednesday as investors initially cheered the results.
“There is considerable capacity for investors to rebuild risk,” Scott Rubner, head of equity and equity derivatives strategy, wrote in a note to clients last Wednesday.
“With uncertainty fading and several of the market’s largest buyers returning, we believe the path of least resistance for US equities is higher into year-end.”
By the end of trading last Thursday, however, US$3 trillion in market value had been wiped out from the S&P 500. Still, most strategists are undeterred. The average year-end target for the benchmark is 7,973, according to data compiled by Bloomberg.
“It would be imprudent to bail on the market after it had a slight adjustment in response to the election outcome,” said Jonathan Golub, chief equity strategist at Seaport Global Holdings, who sees the S&P 500 ending the year at 8,200.
“I’m an unequivocal buyer.”
One major obstacle to an S&P 500 rebound would be continued weakness in the AI trade, which has powered the benchmark higher for most of the four-year-old bull market. The Philadelphia Stock Exchange Semiconductor Index, tumbled 12% last Thursday and remains down 36% from a June peak.
“The semis and the AI infra trade that really carried the market so far this year is going to continue to be under pressure,” said Ohsung Kwon, chief equity strategist at Wells Fargo. “For the market to go much higher from here, you need that contribution from the high-beta trade.”
If fears about a pullback in the AI build-out persist, however, tech giants like Alphabet Inc and Amazon.com Inc that have spooked investors by investing heavily in the technology are likely to provide some upside support on expectations that they’ll be forced to curtail spending, according to Kwon, who has a 7,700 target.
“We don’t want to be too bearish here,” he said. — Bloomberg
