According to a report released Monday by Wolfe Research, traders hoping that the US midterm elections would clear the path for stocks may instead be facing an AI-driven "wall of worry" that is preventing the market from advancing further.
On the same day, Mike Wilson, Chief US Equity Strategist at Morgan Stanley, said the stock market pullback that began several months ago is in its final phase and investors should take the opportunity to position for risk.
The team of strategists led by Chris Senyek at Wolfe Research wrote in the report that investors are now paying more attention to AI buildout, and the trade surrounding this technology has become a "show-me" story, even though the midterm elections could still be the biggest catalyst for US stocks this week.
Senyek said the AI trade is "now being driven by technical trading factors, including signs of shakeout as investors lock in gains for the year."
Last week, the Nasdaq 100 fell about 2%, dragged down by disappointing results from Alphabet (GOOGL.US) and Amazon (AMZN.US). On Monday, the index continued to decline.
Senyek expects US stocks to remain range-bound as traders assess the mixed results from hyperscalers. He said Nvidia's (NVDA.US) earnings report on November 17 will be "crucial" for the AI trade to "regain favor."
Senyek said the stock market "remains blocked by a well-known 'wall of worry,'" adding that the latest hyperscaler developments are not entirely bad.
He noted that Anthropic PBC's filing of an S-1 document, Microsoft's (MSFT.US) solid results, and positive signals from Oracle's (ORCL.US) analyst day were all overshadowed by news from Alphabet and Amazon.
Senyek said execution missteps by hyperscalers could continue to weigh on the market in the near term.
Senyek pointed out that whether US President Donald Trump will increase pressure on Iran after the midterm elections, and the subsequent impact on oil prices, is "the biggest macro variable going forward."
Data compiled by Morgan Stanley shows that since 1950, US stocks have risen in both the 6-month and 12-month periods following every midterm election.
Senyek expects that as long as oil prices remain stable and Nvidia's earnings report and Anthropic's upcoming IPO "prove to be positive catalysts," the market will rise through the end of the year after the midterm elections.
He also said that over the past 30 years, US stocks have historically tended to rise starting in November; this year, it depends on "how long last week's AI trade 'hangover' lasts."
As Wolfe Research sends a cautious signal, Wall Street strategists are trying to predict the direction of the stock market after the US midterm elections. Mike Wilson, Chief US Equity Strategist at Morgan Stanley, said Monday that the stock market pullback that began several months ago is in its final phase and investors should take the opportunity to position for risk.
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