After the U.S. midterm elections, major trading firms on Wall Street collectively turned bullish on U.S. stocks, but within just one day they encountered a severe market backlash.

After the election results were released, institutions such as JPMorgan Chase, Citadel Securities, and UBS successively issued buy signals to clients, with a highly consistent core logic: pre-election positions were significantly compressed, and the dissipating uncertainty would drive capital back, with the path of least resistance for U.S. stocks before the end of the year being upward. On Wednesday, the S&P 500 index surged nearly 2% in one day, and the Dow Jones index rose over 3%, momentarily confirming this judgment. However, just one day later, anxiety surrounding AI trading suddenly intensified, leading to a loss of $2.3 trillion in market value for the Nasdaq 100 index in a single day, and the S&P 500 index plummeted 4.4%, with all sectors affected.

This turnaround caught Wall Street trading desks off guard.

John Flood, the head of U.S. equity execution services at Goldman Sachs, wrote in a client report that Wednesday was one of the busiest trading days for Goldman Sachs' stock trading desk this year, while Thursday was "the exact opposite" — "Our phones were inundated with inquiries, but unfortunately we couldn’t see the direction clearly." He stated that long-term investors were once again "stuck in a stalemate."

Collective bullishness before the election, highly consistent logic

Before and after the midterm election results were released, major trading institutions on Wall Street nearly unanimously issued bullish signals to clients, based on the core premise that pre-election positions were extremely compressed, providing ample fuel for a rebound.

Scott Rubner from Citadel Securities wrote in a client report: "With the election over and volatility expected to normalize, investors have considerable space to rebuild risk exposures. As uncertainty fades and the market's biggest buyers gradually return, we believe the path of least resistance for U.S. stocks before the end of the year is upward." Data from Citadel Securities showed that the net positioning of systematic trend-following strategies in U.S. stocks was approximately negative 3.3 standard deviations, situated at the 10th percentile historically since 2018; if the market continues to stabilize at key technical levels, the trend-following strategies are expected to trigger systemic buying.

Davide Montoni from UBS similarly believed that the election could become an upward catalyst for technology stocks after their volatility. "The earnings reports from large-scale cloud computing companies clearly failed to reassure investors, but crossing the hurdle of the election may trigger a short squeeze by the end of the year." JPMorgan's U.S. market intelligence team maintained a tactical bullish stance, arguing that the significant pullback in technology stocks in October had created opportunities for recent rebounds and recommended a "dumbbell strategy" combining tech stocks with cyclical stocks.

The data supporting this judgment was also ample: hedge funds had continuously reduced their exposure to U.S. stocks before the election, with short positions nearing five-year highs; retail investors had net bought U.S. stocks for 22 consecutive trading days since October 5, accumulating nearly $33 billion; and the corporate buyback window was set to be massively reopened with the end of the earnings season, with an expected buyback value ratio rising to 85% before November 9.

In one day, bullish judgments completely fell through

However, the conclusion of the election did not eliminate the core contradictions suppressing the market.

According to Bloomberg reports, on Thursday, concerns over the returns on AI investments and the costs of computing infrastructure suddenly erupted, with the Nasdaq 100 index shedding $2.3 trillion in one day, and the S&P 500 index falling 4.4%, all sectors declining in unison. Goldman’s John Flood pointed out that investors who had significantly reduced their positions due to election uncertainty were caught off guard by Wednesday's rebound; hedge funds immediately began selling AI cloud computing stocks that they had just purchased the previous day, while long-term investors found themselves once again in a wait-and-see mode.

Prior to this, Alex Altmann, Barclays' head of global equity tactical strategy, was one of the few skeptics among the major Wall Street trading desks. He had previously warned that the midterm elections were unlikely to become the "clearing event" that the market had hoped for—the main factors suppressing the stock market, such as the investment return prospects of AI and the financing costs of computing infrastructure, would not be resolved by the election results.

Systematic selling pressure compounded, losses exceeded expectations

The intensity of this sharp decline was largely amplified by the mechanical selling of systematic strategies.

According to Bloomberg reports, Barclays’ equity tactical strategy model indicated that volatility-controlled funds might reduce their stock exposure by about 30 percentage points in a single day, one of the largest daily adjustments since the market turmoil triggered by the COVID-19 pandemic, corresponding to around $135 billion in U.S. stock futures selling over the next 24 to 48 hours. Alex Altmann stated: "We expect this trend to continue tomorrow, as deleveraging will spread to retail and long-term investor channels."

ETF rebalancing further exacerbated the selling pressure. Barclays noted that Thursday was expected to be the largest leveraged ETF selling rebalancing day in history.

Retail investors, previously viewed as an important source of buying during market declines, also chose to retreat this time. According to data from Vanda Research, as of Thursday at 3 PM New York time, retail investors had net sold $338 million in individual stocks, likely setting a new record for the largest single-day net sell-off since the COVID-19 pandemic.

Short-term twists, bullish logic has not come to an end

Despite the sharp setback, Wall Street’s bullish judgment has not yet declared an end.

As of 6:25 AM New York time on Friday, S&P 500 futures rose 0.3%, and Nasdaq 100 futures jumped 1.5%, indicating some stabilization in market sentiment. As Bloomberg pointed out, a large daily fluctuation is not sufficient to alter market trends, and the previously bullish views of various trading desks may still be realized at some point in the future.

However, this collective "slap in the face" event profoundly reveals the difficulty of predicting the direction of the stock market—Even the most advanced professional institutions on Wall Street find it difficult to foresee the future in the face of the structural variable of AI valuation reconstruction.

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