U.S. stocks opened lower but rallied on Wednesday as investors digested the midterm election results.
JPMorgan's trading desk expects technology stocks to rebound, with the market rally no longer confined to a handful of mega-cap leaders.
The bank's U.S. market intelligence team remains tactically bullish, arguing that although investors are beginning to be more selective about AI-themed names, the recent pullback in tech stocks still harbors short-term recovery opportunities.
"We would not recommend abandoning tech stock trades and playing for a tactical rebound," the team led by Andrew Tyler wrote in a research note on Wednesday.
The team favors a barbell strategy that pairs tech stocks with cyclical stocks, with a higher allocation weight to cyclicals.
Investors are assessing the impact of a Democratic-controlled Congress on the tech industry, particularly the outlook for AI infrastructure capital expenditure.
Texas Governor-elect Gina Hinojosa has proposed immediately pausing approvals for new data center construction until accompanying regulatory rules are put in place 鈥?a concern that triggered a sharp selloff in tech stocks overnight.
The tech-heavy Nasdaq 100 Index rose 1.8% on the day.
JPMorgan's trading desk believes market fears over the Texas policy shift may be exaggerated: there are plenty of other U.S. states that can accommodate data center projects, and the new rules would not bring construction to a complete halt.
Still, the team did not give a clear bullish signal on the AI trade.
For investors to add exposure again, they would need to wait for multiple confirming signals: sufficiently washed-out positioning sentiment, cloud giants' capital expenditure plans being finalized, positive earnings from semiconductor and memory companies, and a revival in capital markets activity.
Barclays also warned on Wednesday morning that the election results are not enough to support a sustained U.S. stock market rally through the end of the year.
Beyond the tech sector, the market is also watching whether Democrats will push to end the Iran war.
After the new Congress takes office in January, lawmakers could push to cut off war funding, or invoke legislation requiring the withdrawal of overseas troops deployed for more than 90 days without congressional authorization.
JPMorgan said the market is increasingly pricing in the possibility of a ceasefire agreement.
Historical patterns also offer support to the bulls.
The research note cited data from JPMorgan analyst Craig Cohen: since 1950, the S&P 500 has risen every year following a midterm election, with an average gain of about 15%.
The bank's market intelligence team added that historically, in the three months after a midterm election, the S&P 500 has gained an average of 5.4%; over six months, 11.4%; and over nine months, 12.5%.
The team judges that a broad-based sector rally is likely to spread, but energy sector upside is limited while tech sector downside risk is narrowing.
If the yield curve continues to steepen, consumer and financials are its most favored cyclical sectors.
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