- The vibes on Wall Street are bullish again after a nasty sell-off in the AI sector after the midterms.
- Strategists see a year-end rally in stocks now that valuations have been seen a reset.
- JPMorgan and HSBC are among those taking a bullish stance heading into 2027.
The sell-off that ripped through the market's AI trade after the midterms already seems like a distant memory for Wall Street's forecasters.
Stocks were surging on Monday, and whispers of a year-end stock rally are again percolating as investors use last week's swoon to buy the dip in beaten-down names.
Analysts and strategists say that the tech bloodbath looks to be over, at least for the time being. They cite signals such as the latest drop in valuations and the market's general tendency to end the year on an upbeat note, especially in the aftermath of an election.
Here's where major indexes stood around 11:30 a.m. ET:
- S&P 500: 7,518.61, up 1.92%
- Dow Jones Industrial Average: 52,204.17, up 1.79% (+918.44 points)
- Nasdaq 100: 27,733.87, up 2.76%
Here's what analysts say could prop up a fresh rally into year-end.
AI demand is still strong
Luke Lango, an independent tech analyst, said it was possible the latest recovery was a dead cat bounce, a short-lived recovery before stocks make new lows. Even so, the market's fears that AI capex is about to sputter appear overblown, he said, pointing to how any data-center slowdown would be forced by politics, not sparked by falling AI demand.
"Spending gets stretched out, not cut off. It's a transition, not an ending, and it leaves us more bullish than ever on the next three to five years, even as we stay cautious on the next three to six months," Lango wrote in a client note last week.
Seasonal patterns are positive
There's also a seasonal case for stocks to move higher through the end of the year. In the six months following a midterm election, the S&P 500 has gained an average 14% since 1970, compared to an average 6% gain in a non-midterm year, according to an analysis from BlackRock.
Independently, stocks also tend to see their best gains in November and December. Since 1950, the S&P 500 has gained an average 1.85% in November, the best month of the year by average return, according to an analysis from Knode Wealth Management. The index has gained an average 1.4% in December, making it the third-best performing month of the year.
The S&P 500 has the highest chance of ending December on a positive note. December was a winning month for the index 70% of the time since 1928, with the index more likely to gain in December than any other month of the year, according to an analysis from Yardeni Research.
Ned Davis Research, a macro research firm, said it was looking for negative short-term momentum to reverse soon. The firm said its proprietary gauge of momentum indicators had flashed a sell signal as the AI sell-off picked up steam on Thursday, but pointed to the underlying trend for stocks to head higher through year-end.
"This suggests more potential for rocky trading ahead, but the speed of this model means any rebound should be caught quickly with a new buy signal," London Stockton, an analyst at the firm, said, adding that NDR would be looking for wider market breadth in large growth stocks.
De-leveraging appears to be over
In a note to clients, JPMorgan said it remained bullish on stocks through year-end, reiterating its 8,000 price target for the S&P 500. The bank said its view was partly influenced by its positive view for AI, even when considering the impact of a Democratic sweep and potentially tighter regulation on data centers.
Last week's sell-off was likely a "de-leveraging event," with investors and institutional buyers unwinding some of their leveraged positions as valuations declined.
Leverage was hovering near a record high this summer, a risk Wall Street strategists have flagged in markets due to the potential that investors get hit with margin calls, pushing them to deposit more money into their margin accounts or liquidate their positions. Leverage also tends to be "at-risk" in the summer, due to declining liquidity in markets, Dubravko Lakos-Bujas, JPMorgan's head of global markets strategy, wrote in a note.
"The positioning flush has created an attractive entry point. While hyperscalers have less upside in the near-term, their medium-term prospects are attractive with room to re-rate higher," Lakos-Bujas said, noting that tigher computing capacity could also benefit pricing power, profit margins, and operating cash flow for hyperscalers.
Valuations look cheap
Rick Rieder, BlackRock's global fixed income chief investing officer, said valuations looked attractive after last week's big drop. He discounted the idea that the market's AI boom is a bubble, describing last week's sell-off as an "unwind" and a "rebalancing" in equities triggered by the market's large concentration in tech stocks as well as hedge funds closing some of their positions in the sector.
"I think some of these equities now are really cheap, particularly intact," Reider said, speaking to Bloomberg on Friday. "Even if you assume some haircut of forward growth and AI spend, I think these multiples are pretty reasonable today."
Year-end catalysts
In a note to clients, HSBC said it was increasing "tactical exposure" to stocks after the sell-off last week. The bank cut its maximum "overweight" exposure to equities several weeks ago, but said it was now overweight in US stocks again, pointing to a handful of catalysts that face stocks into the end of the year, including Nvidia's earnings report and Anthropic's IPO.
"We're dipping our toes back into equities today," Max Kettner, the chief multi-asset strategist at the bank, wrote in a note. "For this, the sell-off in October has been too much of a rotation than a broad-based sell-off."
Markets are looking ahead to several new catalysts this week. Top of mind is the October inflation report on Tuesday, which will shape the Fed's policy path heading into year-end and beyond. Investors are also waiting on key earnings, comments from a roster of Fed speakers, and producer price index data due Friday.
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