Key Takeaways
- • UBS Securities believes U.S. stocks could launch a year-end rally once the November 3 midterm election results are clear, citing a seasonal and positioning setup it described as a "highly combustible combination."
- • The S&P 500 has averaged a 1.9% gain in November since 1950, the best-performing month of the year, according to UBS data.
- • Hedge funds' net equity exposure remains low while gross exposure sits at multi-year highs, meaning short covering and reallocation could amplify price moves in either direction.
- • UBS recommends hedging a Democratic sweep of Congress with Financial Select Sector SPDR Fund (XLF) puts expiring November 20, as financials rose about 6% in October.
- • Wolfe Research's Chris Senyek argues AI investment return doubts will cap gains, with the Nasdaq 100 already down more than 10% from its October high.
Summary
U.S. midterm elections were held on November 3, and UBS Securities believes U.S. stocks could launch a year-end rally once the results become clear. Davide Montoni, Head of Americas Institutional Equity Derivatives and Quantitative Investment Strategy Sales at UBS Securities, described the setup in a client report as a "highly combustible combination." The thesis rests on two conditions: seasonality, with the S&P 500 averaging a 1.9% gain in November since 1950, and positioning, with hedge funds' net equity exposure at low levels. According to UBS, many institutions had already reduced directional risk, so once political uncertainty clears, short covering and returning capital could occur together. UBS also noted that while net exposure is low, gross exposure remains at multi-year highs, so concentrated position adjustments could amplify moves in either direction.
UBS expects sector performance to diverge depending on which party controls Congress. If Democrats win both the Senate and House, financial institutions and data center operators could face stricter regulatory scrutiny. The S&P 500 financials sector rose about 6% in October, raising the risk of a pullback, and UBS recommends buying XLF puts expiring November 20 as a hedge. In contrast, renewable energy positioning has fallen to a near one-year low, and UBS observed that traders had bought Invesco Solar ETF (TAN) calls expiring in December, betting on a solar rebound if election results strengthen expectations for new energy policy.
UBS did not claim U.S. stocks have shaken off fundamental pressures. On Monday the Nasdaq 100 fell 1.4%, bringing its decline from the October high to more than 10%, which places it in technical correction territory. Earnings and capital expenditure plans from Alphabet (GOOGL) and Amazon (AMZN) have raised investor doubts about AI returns, and Montoni acknowledged that results from major cloud providers have not dispelled those concerns.
Other institutions are more cautious. According to Bloomberg, Wolfe Research strategist Chris Senyek believes fading election uncertainty could help the market, but AI return questions will still cap gains, with investor focus shifting from capital expenditure scale to profitability. According to ORATS data, options pricing implied the S&P 500 would move about 0.8% the day after the election, only slightly above the 0.6% average daily implied move over the past month, suggesting investors were not heavily over-positioned. Middle East developments remain a macro variable, as renewed U.S. military action against Iran after the midterms could pressure oil prices and inflation expectations.
UBS expects sector performance to diverge depending on which party controls Congress. If Democrats win both the Senate and House, financial institutions and data center operators could face stricter regulatory scrutiny. The S&P 500 financials sector rose about 6% in October, raising the risk of a pullback, and UBS recommends buying XLF puts expiring November 20 as a hedge. In contrast, renewable energy positioning has fallen to a near one-year low, and UBS observed that traders had bought Invesco Solar ETF (TAN) calls expiring in December, betting on a solar rebound if election results strengthen expectations for new energy policy.
UBS did not claim U.S. stocks have shaken off fundamental pressures. On Monday the Nasdaq 100 fell 1.4%, bringing its decline from the October high to more than 10%, which places it in technical correction territory. Earnings and capital expenditure plans from Alphabet (GOOGL) and Amazon (AMZN) have raised investor doubts about AI returns, and Montoni acknowledged that results from major cloud providers have not dispelled those concerns.
Other institutions are more cautious. According to Bloomberg, Wolfe Research strategist Chris Senyek believes fading election uncertainty could help the market, but AI return questions will still cap gains, with investor focus shifting from capital expenditure scale to profitability. According to ORATS data, options pricing implied the S&P 500 would move about 0.8% the day after the election, only slightly above the 0.6% average daily implied move over the past month, suggesting investors were not heavily over-positioned. Middle East developments remain a macro variable, as renewed U.S. military action against Iran after the midterms could pressure oil prices and inflation expectations.
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