UBS: A year-end rebound in US stocks is imminent, and the midterm elections may become a "short squeeze" catalyst.

Note that UBS Securities believes US stocks may be poised for a year-end rebound, as favorable seasonal factors and low hedge fund positioning create the conditions for a potential rally after Tuesday's midterm elections. "Hyperscaler earnings clearly did not provide the all-clear signal investors were hoping for, but getting through the election could serve as the catalyst to kick off a year-end short squeeze," said Davide Montoni, head of Americas Institutional Equity Derivatives and Quantitative Investment Strategy (QIS) sales at UBS Securities. On Monday, tech stocks led US equities lower as concerns over the AI trade overshadowed hopes for US-Iran diplomacy. The tech-heavy Nasdaq 100 fell 1.4% to enter correction territory, down 10% from its October high. In Montoni's view, seasonality could support an equity rebound. Since 1950, the S&P 500 has averaged a 1.9% return in November, making it historically the strongest month of the year. Low net exposure among hedge funds could amplify the rally, he wrote: "If the market can clear the last major catalyst of the US midterm elections on Tuesday, it would create a potentially combustible setup." Over the past month, the market has been weighing the potential consequences of Republicans losing control of Congress, including uncertainty over future policy and its impact on AI buildout. Montoni wrote that a landslide Democratic victory could weigh on financial stocks and data center companies. The S&P 500 financials sector has already risen about 6% in October, leaving tactical room to hedge against that outcome. UBS recommends buying Nov. 20 puts on the State Street Financial Select Sector SPDR ETF. Montoni also sees opportunities in renewable energy stocks, where investor positioning has fallen to about a one-year low. A Democratic victory could provide a political catalyst for the sector, while relatively light positioning leaves investors room to rebuild exposure. According to UBS, traders bought December calls on the Invesco CECEP Solar Energy ETF last week.