"A Volatile Environment": UBS Anticipates an S&P 500 Rally Following the U.S. Election

UBS Securities believes that U.S. stocks are poised to resume their upward trend by the end of the year, thanks to favorable seasonal trends and the low weighting of stocks in hedge fund portfolios. The bank sees the conditions for a stock market rally following the U.S. midterm congressional elections, which are taking place on Tuesday.

Seasonal factors point to a market recovery following the October decline, according to Davide Montoni, head of equity derivatives and quantitative investment strategies at UBS Securities. Bloomberg quotes his note. Since 1950, the broad-market S&P 500 index has gained an average of 1.9% in November, making this month historically the most successful of the year. Hedge funds’ low net exposure could amplify the rally, “creating a potentially explosive situation if the market manages to overcome the last major catalyst—the U.S. midterm elections on Tuesday,” Montoni wrote.

“The hyperscalers’ earnings reports clearly did not give investors the reassurance they were hoping for that all their concerns were behind them. However, the conclusion of the election could serve as a catalyst that triggers a sharp rise in the market by the end of the year,” the trader noted.

The market is not in the best shape right now: On Monday, November 2, the Nasdaq 100 “tech” index entered correction territory, having lost more than 10% from its October high. Tech stocks attempted a modest rebound on Tuesday: the Nasdaq 100 rose 0.6%, the broader Nasdaq Composite gained 0.8%, and the S&P 500 added 0.3%. Only the Dow Jones Industrial Average remained in the red, down 0.4%.

The election results could shift the balance of power in the U.S. Congress: the Democrats have a chance to take the majority away from the Republicans not only in the House of Representatives but also in the Senate. Under these circumstances, investors are concerned about the uncertainty surrounding future government policy on the development of AI infrastructure.

According to Montoni, a decisive victory by the Democrats could put pressure on the stocks of financial companies and data center operators. The financial sector of the S&P 500 index has already risen by about 6% in October, creating opportunities for short-term hedging against such a scenario. UBS recommends buying put options on the State Street Financial Select Sector SPDR ETF with an expiration date of November 20.

Montoni also sees investment opportunities in the stocks of companies operating in the renewable energy sector. Investor positions in this sector have fallen to roughly their lowest level of the year. A Democratic victory could serve as a political catalyst for growth, and investors’ relatively modest exposure to the sector leaves room to build positions.

According to UBS, traders were buying December call options last week on the Invesco Solar ETF, which invests in the stocks of solar energy companies. On Tuesday, it rose 3%, though it remains down more than 11% year-to-date.

This article was AI-translated and verified by a human editor