Is a Year-End Rally for US Stocks Here? Wall Street Trading Firms Bet on a Post-Midterm Election Rise, With Pre-Election Position Clearing Becoming the Core Bullish Argument

Title context: Is a Year-End Rally for US Stocks Here? Wall Street Trading Firms Bet on a Post-Midterm Election Rise, With Pre-Election Position Clearing Becoming the Core Bullish Argument Text: Several of Wall Street's largest trading firms are urging clients to increase exposure to US stocks, betting that investors' depressed positioning ahead of the midterm elections has created room for a year-end rally. Large technology stocks led a broad market rally on Wednesday. Earlier, Democrats won control of both chambers of the US Congress, and President Donald Trump said he would accept the election results. Investors had positioned for the opposite outcomethey expected that under a Democrat-controlled Congress, AI infrastructure buildout would face stricter regulatory scrutiny. Before the November vote, hedge funds cut US equity exposure and rebuilt bearish positions, pushing short holdings in the stock market close to a five-year high, while systematic investors also compressed exposure. The resulting position reset is now becoming one of Wall Street's main arguments for a bullish post-election rebound. "This is not just a reverse replay of the October move," said Max Kettner, chief multi-asset strategist at HSBC. "Basically, this is buying everything up." The rally follows a grim October for equity investorsa month in which they had to contend with disappointing tech earnings as well as election-related uncertainty. Those concerns pushed the tech-heavy Nasdaq 100 Index into its third major correction of the year earlier this week and prompted institutional investors to sharply reduce risk appetite. At JPMorgan, traders said October's hedge fund deleveraging and liquidation of AI positions have created a more favorable environment for stocks. The bank's US market intelligence team remains tactically bullish, arguing that the recent tech selloff may offer an opportunity for a short-term repaireven as investors become more selective about the winners and losers in AI. "We are not abandoning the tech trade and will position for a tactical rebound," the team led by Andrew Tyler wrote in a Wednesday report. The strategists favor a barbell strategy combining tech stocks with cyclicals, with a heavier allocation to cyclicals. Preliminary performance data from research firm PivotalPath show that technology, media and telecom (TMT) equity funds and multi-strategy hedge funds were at the center of October's deleveraging and forced liquidation of tech holdings. JPMorgan strategist Nikolaos Panigirtzoglou said that after the painful October selloff, hedge funds may need weeks of market stability before rebuilding AI exposure. At Nomura, cross-asset strategist Charlie McElligott said Wednesday's rally partly reflected investors unwinding hedges after the election landed smoothly without causing a major market shock. He said the sharp pullback in VIX index futures and the VVIX, which measures volatility in the options market, points to cooling demand for protective positions accumulated over previous weeks due to election uncertainty and AI concerns. The VIX indexalso known as Wall Street's "fear gauge"recorded its largest one-day drop since April 2025 on Wednesday. McElligott wrote that the market believes the election outcome will bring "a forced slowdown in US data center construction, thereby easing concerns about the 'prisoner's dilemma of an endless capex race' among hyperscalers." That alleviates some worries about the massive credit and equity issuance needed to finance the AI boom. Citadel Securities' Scott Rubner likewise sees room for a year-end rally, citing resilient corporate earnings, depressed investor positioning, and the removal of election uncertainty. "With the election over and volatility likely to normalize, investors have considerable room to rebuild risk exposure," Rubner wrote in a Wednesday note to clients. "We believe the path of least resistance for US stocks into year-end is higher." Citadel Securities data show that retail investors have been net buyers of US stocks for 22 consecutive trading days since October 5, accumulating nearly $33 billion in purchases. Meanwhile, systematic fund positioning has fallen to its lowest level since March 31, leaving room for more buying if the stock market recovery continues. Investors are also awaiting the next major test for tech and AI-related assets: the highly anticipated initial public offering (IPO) of Anthropic PBC. The deal is expected to rank among the largest IPOs in history; for some, it could clear the way for a more decisive return to tech stocks, especially after October's sharp swings. "For me, the real clearing event is the Anthropic IPO," said HSBC's Kettner. "Once the Anthropic IPO is announced and completed smoothly, I think we will be fully long tech stocks and short everything that surged in October."