US stocks plunge amid midterm election turmoil! Wall Street's bullish expectations get slapped in the face, and short-term selling pressure may be hard to shake off.

Title context: US stocks plunge amid midterm election turmoil! Wall Street's bullish expectations get slapped in the face, and short-term selling pressure may be hard to shake off. Text: For weeks, major Wall Street trading desks had been saying that the stock market rally would resume once the US midterm elections were over. Trading desks at JPMorgan, Citadel Securities and UBS Securities had all said the midterms would be a "clear-the-decks" event for the market, helping to ease pre-election unease. These desks argued that with a large amount of cash still sitting on the sidelines, investors would be inclined to rebuild equity positions. The pre-election bullish view was largely based on the judgment that investors had positioned too defensively ahead of the vote, and would therefore likely re-add risk exposure as election uncertainty cleared. According to Goldman Sachs' prime brokerage data, for example, hedge funds cut equity risk exposure in October at the fastest pace since March. Scott Rubner, head of equity and equity derivatives strategy at Citadel Securities, said the election could clear the way for a year-end rally. "As the election dust settles, market volatility may gradually normalize, and investors have considerable room to rebuild risk exposure," he wrote in a client note on Wednesday. "With uncertainty fading and several major buyers returning to the market, we believe the path of least resistance for US stocks into year-end is most likely higher." Davide Montoni of UBS Securities expressed a similar view. He argued that after a period of sharp swings in tech stocks, the vote result could serve as a catalyst for a market rally. "The hyperscalers' earnings clearly failed to give investors the clear positive signal they were hoping for, but getting past the election hurdle could be the catalyst that triggers a year-end short squeeze," he said. JPMorgan's trading desk also expected a rebound in tech stocks, with the rally broadening out from a handful of mega-cap names to the wider market. The bank's US market intelligence team said its tactical view was tilted bullish, reasoning that the recent tech selloff had created an opportunity for a short-term bounce. Thursday's market action, however, delivered a dramatic reversal to that judgment. Anxiety over the artificial intelligence (AI) trade sent the S&P 500 plunging 4.4%, the Nasdaq tumbling more than 5% into correction territory, and the Nasdaq 100 shedding $2.3 trillion in market value. The market now fears that Democrats, after gaining ground in Congress and in multiple states, will tighten AI regulation, and that stricter AI oversight and local restrictions on data center construction could slow the US AI infrastructure investment process. John Flood, head of Americas equity execution services at Goldman Sachs Group, said the bank's equity trading desk saw one of its busiest sessions of the year on Wednesday. In a note to clients, he wrote that Thursday was "the exact opposite" "our phones have been ringing off the hook with clients asking us for market color and views. Unfortunately, we're not seeing much valuable information either at the moment." He said in the note that long-only institutions had once again fallen into a "frozen" state. He noted that investors had sharply cut equity exposure ahead of the midterms and were therefore caught off guard by Wednesday's rebound. Hedge funds, meanwhile, have begun selling some of the AI hyperscaler stocks they had just bought the day before. While a single trading day does not determine the stock market's trend, and the trading desks' earlier bullish views could still pan out, Thursday's selloff underscores that predicting the market's direction is no easy task even for Wall Street professionals. It is worth noting that Alex Altmann, head of global equity tactical strategy at Barclays, was one of the few skeptics among major Wall Street trading desks. He had warned that the midterms were unlikely to be the market-clearing event investors were hoping for, because the biggest pressures weighing on stocks such as whether AI investment will pay off and the financing costs needed to build AI infrastructure would not be resolved by the vote outcome. Systematic flows further amplify selling pressure The sheer size of Thursday's decline was also amplified by so-called "systematic strategies." Many of these strategies trade based on market price action rather than fundamental drivers. Barclays' equity tactical strategy model showed that volatility-control funds could cut equity exposure by about 30 percentage points, one of the largest single-day adjustments since the market turmoil of the COVID era. The model also showed that these funds could sell about $135 billion of US equity futures over the next 24 to 48 hours. "As deleveraging pressure spreads through real-money channels such as retail and long-only investors, we expect this to continue tomorrow," Altmann added. Exchange-traded fund (ETF) rebalancing also added to market pressure. Barclays noted that Thursday was expected to be the largest leveraged ETF selling rebalance day on record. Retail investors another major source of demand in past market pullbacks were also unwilling to rush in. According to Vanda Research data, retail investors abandoned their signature buy-the-dip strategy on Thursday and sold individual stocks at the fastest pace since the worst of the COVID-induced market crash in March 2020. Vanda Research noted that retail selling in the first 30 minutes of Thursday's session was the largest single 30-minute sell record in recent months, approaching the peak seen during the retail panic exit in late July 2024. It added that net retail outflows from individual stocks reached $338 million shortly before the close. The selling marked the third-largest single-day retail liquidation of individual stocks on record, behind only March 12 and March 17, 2020. As retail retreated, institutional investors were also broadly reducing risk exposure, and systematic selling pressure kept building. Vanda analyst Viraj Patel noted that earlier this week, institutional buying of call options had fallen to its lowest level in a year. Meanwhile, leveraged exchange-traded funds (ETFs) faced forced rebalancing pressure before the close, estimated at $42 billion to $48 billion. In addition, volatility-targeting funds were simultaneously reducing risk exposure. Viraj Patel warned that institutional buyers stepped back at exactly the moment retail investors and systematic strategies were dumping stocks a highly unusual flow pattern that rarely appears unless the market is under severe stress. UBS noted that retail-led selling triggered risk-control systems in the futures market and forced liquidation of leveraged ETFs. UBS further warned that systematic funds (especially risk-control funds) were expected to sell more than $100 billion on Friday, and the current adjustment may not yet have bottomed. Charlie McElligott, cross-asset strategist at Nomura, noted that current negative gamma positioning in the market is "enormous," meaning price declines will continue to amplify the trend. Goldman's CTA model estimated that if the market falls further, the S&P 500 could face about $164 billion of systematic selling pressure. BTIG chief technical strategist Jonathan Krinsky cautioned that rotation needs buyers on both sides. Healthcare is already 19% above its 200-day moving average, the highest on record, and defensive buying is running out of steam, so he believes the next round of defensive buying lacks a source of funds. Historical data also suggest selling could intensify in the short term, even though the market typically recovers after three months. Frank Cappelleri, founder of CappThesis, used past US midterm election cycles as a reference and found that history likewise suggests more volatility may lie ahead in the near term. The chart analyst said that in 13 midterm election cycles since 1974, the Nasdaq rose 12 months after the election in all but one. "Keep in mind that the process could come with sharp swings," he said. Citing 2018 as an example, Frank Cappelleri noted that the Nasdaq rose the day after Democrats won House seats that year. The market then suffered a sharp selloff in December, but the index still ended up about 15% a year after the election. Looking back at 10 technical corrections over the past decade, after the selloffs in 2025, 2022, 2020 and 2018, the Nasdaq suffered further sharp declines over the following month. In all of those cases except 2022, however, the Nasdaq was back in rally mode six months later the January 2022 correction produced a more severe outcome, with the Nasdaq falling a further 18.3% over the next six months and 24.3% after a year. Overall, measured from the bottom of technical corrections, the Nasdaq has risen an average of 9.41% over the following three months and 17.03% over six months.