After the midterm elections, Wall Street collectively turned bullish on U.S. stocks

The dust has settled on the U.S. midterm elections, and major trading institutions on Wall Street are collectively sending buy signals to their clients.

The Democratic Party won control of both houses of Congress, and Trump has stated he accepts the election results. The dissipating uncertainty triggered a significant market rebound. The S&P 500 index rose nearly 2% in a single day, the Dow Jones index increased by over 3%, and the VIX fear index recorded its largest single-day drop since April 2025. The technology and communication services sectors led the gains, while oil prices plummeted over 8%, and the consumer sector also performed strongly.

Against this backdrop, institutions such as JPMorgan, Nomura, HSBC, and Citadel Securities have successively released bullish reports, with a highly consistent core logic: institutional holdings had been significantly compressed before the election, short positions were close to a five-year high, and combined with seasonal patterns and the reopening of corporate buyback windows, favorable conditions for a rebound before the end of the year were created.

Fidelity believes that an important change brought about by the midterm election results is that the U.S. government will enter a state of divided governance: the Democratic Party controls Congress, while the Republican Party continues to hold the White House. This political landscape may limit the advancement of government policies and reduce some policy uncertainties, while the market typically tends to welcome such checks and balances.

More noteworthy is the historical performance. Fidelity's statistics show that since 1938, the S&P 500 index has risen in 95% of the years in the 12 months following midterm elections, with an average increase of about 14%.

Institutional Position Reset, Short Squeeze Releases Upside Space

The core of this bullish logic is that investors had completed large-scale de-risking operations before the election, providing ample "fuel" for the market rebound.

Hedge funds continued to reduce their exposure to U.S. stocks and increased short positions ahead of the November vote, with short positions in the stock market nearing a five-year high; systematic investors also simultaneously compressed their positions.

JPMorgan stated that the de-leveraging of hedge funds and the liquidation of AI positions in October have created a more favorable backdrop for U.S. stocks. The U.S. market intelligence team led by Andrew Tyler maintained a tactical bullish stance in a report on Wednesday and suggested adopting a "barbell strategy" with a tilt towards cyclical stocks.

Scott Rubner of Citadel Securities wrote in a client report:

"With the election over and volatility expected to normalize, there is ample room for investors to rebuild risk exposure. We believe the path of least resistance for U.S. stocks before the end of the year is upward."

Data from Citadel Securities shows that the net position of systematic trend-following strategies (CTA) in U.S. stocks is currently about negative 3.3 standard deviations, at the 10th percentile historically since 2018, the lowest level since March 31 of this year, and a significant drop from positive 1.7 standard deviations three months ago. Once the market stabilizes at key technical levels, trend-following strategies are expected to trigger systematic buybacks.

Retail Investors and Buybacks Drive Dual Engines, Structural Support for Buying Emerges

Positive signals are also emerging on the demand side, with retail investors and corporate buybacks forming a synergistic effect.

Data from Citadel Securities shows that since October 5, retail investors have net bought U.S. stocks for 22 consecutive trading days, accumulating nearly $33 billion, marking the sixth longest and fifth largest buying record since 2017, with an average daily buying scale 40% higher than the past year's average. Notably, this buying occurred against a backdrop of the S&P 500 index declining about 2% during the same period. Year-to-date, retail investors have net bought $251 billion in U.S. stocks, surpassing the entire record for 2021.

On the corporate buyback front, as the window for third-quarter earnings reports gradually closes, buyback activity is returning on a large scale. Citadel Securities estimates that in mid-October, only about a quarter of the market value of S&P 500 constituents was in a repurchasable state, but by election day, this proportion had risen to about two-thirds, and is expected to further increase to 85% by November 9. As of November 2, the total new buyback authorizations for this year have reached $1.5 trillion, exceeding the previous annual record. In October alone, new buyback authorizations totaled $166 billion, more than double the historical monthly average.

Technology Stock Valuations Significantly Compressed, Cost-Effectiveness Highlighted After Repricing

Beyond the technical aspects, the sharp contraction in technology sector valuations is also an important basis for institutions to go long.

Data from Citadel Securities shows that the current price-to-earnings ratio of the Nasdaq 100 index has dropped to 19.1 times, the lowest since October 2022, representing a 24% discount from the January peak; relative to the S&P 500 index, the Nasdaq premium is only 5%, the lowest since January 2017, far below the approximately 20% ten-year average. The semiconductor sector has seen even more severe valuation compression, with the price-to-earnings ratio of S&P 500 semiconductor constituents dropping to 13.8 times, a 45% decline from the January peak, the lowest since July 2022, and trading at a 25% discount to the S&P 500, the deepest discount since December 2018.

This valuation reset occurs against a backdrop of continuously revised earnings expectations. Since June 30, forward earnings expectations for storage, AI infrastructure, and semiconductors have been raised by 32%, 31%, and 30%, respectively, but corresponding price-to-earnings ratios have compressed by 50%, 36%, and 35%. So far in the third-quarter earnings season, 83% of companies have exceeded earnings expectations, higher than the historical average of about 75%, and among the top ten in the same caliber since 2005.

Max Kettner, Chief Multi-Asset Strategist at HSBC, stated:

"This market situation is not just a correction of the October decline; it is essentially a comprehensive buy of everything."

Policy Landscape Changes, Expectations for AI Infrastructure Regulation Tend to Ease

The market has preliminarily digested the policy implications of the Democratic Party controlling Congress, with some investors believing its impact on AI investments may be mixed.

Charlie McElligott, cross-asset strategist at Nomura, pointed out that Wednesday's rebound partially reflected investors unwinding hedges after the election, with VIX futures and the VVIX index, which measures options market volatility, both falling sharply, indicating that the protective demand accumulated due to election uncertainty and AI concerns is rapidly dissipating.

He wrote that the market believes the election results will lead to "the pace of U.S. data center construction being forced to slow down, thereby alleviating concerns about the 'prisoner's dilemma' style arms race in capital expenditures for hyperscale cloud providers," thus reducing the credit and equity financing pressures required by the AI boom. Jurrien Timmer, Global Macro Director at Fidelity, also noted that the Democratic blue wave may limit data center expansion, "which could benefit the dominant hyperscale cloud providers and core members of the 'Mag 7'."

JPMorgan strategist Nikolaos Panigirtzoglou warned that hedge funds, after experiencing painful sell-offs in October, may need several weeks of market stabilization before re-establishing AI exposure.

Anthropic IPO Becomes Key Node for "Full Bullish" Sentiment in Technology Stocks

In addition to the multiple favorable factors mentioned above, institutions are also waiting for a node seen as the "ultimate clearing event" for technology sentiment.

Kettner from HSBC stated: "For me, the real clearing event is the Anthropic IPO. Once the Anthropic IPO is announced and successfully completed, I believe it will be time to go long on technology stocks across the board and sell those defensive assets that surged in October." This transaction is expected to become one of the largest IPOs in history, carrying significant signaling implications for the overall sentiment in technology stocks.

Historical data also supports the year-end market outlook. Data from Citadel Securities shows that since 1950, the S&P 500 has risen in both the 6 and 12 months following each midterm election, with a median increase of 14.5% over 12 months. The fourth quarter of midterm election years has historically been the strongest quarter in the U.S. presidential term cycle, with an average increase of 5.6% for the S&P 500, higher than the average of 2.9% for all years. As the market enters the election phase this year, it is lagging behind the typical seasonal trajectory of midterm election years; historically, nearly 60% of midterm election year fourth-quarter lows have occurred in October, followed by a median increase of nearly 10% before the end of the year.

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The market has risks, and investment should be cautious. This article does not constitute personal investment advice and does not take into account individual users' specific investment objectives, financial situations, or needs. Users should consider whether any opinions, views, or conclusions in this article align with their specific circumstances. Investing based on this is at one's own risk.