I. The Delayed Cold Shower
Since September 15, we've counseled proceeding with caution in the stock market through the midterm elections. We anticipated buying opportunities after Tuesday's elections. Stocks rallied on Wednesday. But they plunged today.
The S&P 500 fell 4.4%, its worst day since the April 2025 tariff shock (charts). The Nasdaq composite sank 5.5%, entering correction territory, while the Dow dropped 3.4% and the PHLX Semiconductor index plunged 12.0%. The cold shower we warned might follow a Democratic sweep arrived a day late.
We believe that Wednesday's rally was driven by short covering as two key risks failed to materialize. First, investors feared President Donald Trump might contest close elections, potentially triggering a constitutional crisis. Instead, on Wednesday morning, he acknowledged the Democrats' decisive victory and said he is willing to work with them. Second, investors feared an immediate re-escalation of the war in Iran after the midterms. But oil prices fell sharply on Wednesday on reports that the US and Iran are pursuing a diplomatic solution.
On Thursday, investors began discounting the implications of the Democratic sweep for the economy's golden goose: the AI investment boom.
