AI trades are expected to make a comeback after the US midterm elections! Citadel Securities: Investors are waiting for the right moment to re-enter the market.

Scott Rubner, Head of Equity and Derivatives Strategy at Citadel Securities, said that as the US midterm elections approach, investors are temporarily avoiding artificial intelligence (AI)-related stocks, but this situation could reverse after the November elections. At that point, as political uncertainty fades, capital is expected to flow back into the AI sector, driving related stocks to outperform the broader market once again. Speaking in an interview on Tuesday during Citadel Securities' Global Markets Future Conference in New York, Rubner said investors generally view the US midterm elections as an important juncture for repricing market risk, and the AI sector could regain relative strength after the elections. He noted that the message from institutional clients is quite clear at present: investors are willing to buy at higher prices in the future, but are unwilling to take on additional risk before a major political event occurs. The outcome of the US midterm elections will provide clearer direction on AI regulation and other industry policies. If Democrats win control of both the House and Senate, Wall Street strategists expect related regulatory policies may become stricter, putting further pressure on semiconductor stocks. Under the combined influence of political uncertainty and declining market risk appetite, AI-related stocks have recently seen significant selling. Data shows that as of last Friday, the Philadelphia Semiconductor Index fell for eight consecutive trading days, with a cumulative decline of nearly 16%. Meanwhile, the tech-heavy Nasdaq 100 Index fell 5.5% last week, and the S&P 500 also showed weakness. Rubner's assessment echoes recent views from Bank of America strategist Michael Hartnett. Hartnett previously expected that amid rising interest rates and persistently high inflation, investors would seek safe haven in the weeks before the US midterm elections and reduce allocations to high-risk assets. However, despite the recent pressure on tech stocks, major US stock indices remain at relatively high levels overall. As of Monday's close, the S&P 500 was still hovering near its historical high, and the Nasdaq 100 was only about 5% below the high set on October 6. It is worth noting that retail and institutional investors have shown a clear divergence in their actions during the recent market adjustment. Rubner said retail investors are still actively buying on dips. Last week, retail buying of semiconductors, new cloud service providers, and memory chip-related stocks reached its highest level in 16 weeks, indicating that individual investors remain confident in the long-term growth prospects of the AI industry. In contrast, institutional investors continue to reduce leverage and risk exposure. This divergence in capital flows suggests that although some investors view the recent pullback as a buying opportunity, large institutions still tend to remain cautious before the midterm elections. Rubner further noted that the recent selloff in the AI sector is not an isolated event, but part of a broader style rotation in the US stock market since the second half of this year. He said that from January 1 to June 22 this year, the momentum investment strategybuying recently strong-performing stocks and selling weak-performing oneshad a cumulative return of as much as 70%. However, as market style reversed, the strategy's performance deteriorated significantly afterward, and its year-to-date return has now turned negative. Similar changes have occurred within the AI sector. In the first half of this year, the strongest-performing AI stocks outperformed laggards by more than 100% cumulatively, but this relative gain has also reversed since then. Rubner believes this reflects the market undergoing a large-scale unwinding of popular trades. Previously highly concentrated capital allocations are gradually loosening, and investors are beginning to cut holdings in tech stocks and AI concept stocks that have risen sharply. However, he does not believe the recent adjustment means the AI investment theme is over. On the contrary, once the key political event of the midterm elections has passed, the market's judgment on the regulatory outlook will become clearer, and institutional investors may also increase risk exposure again.