Democrats are projected to take both the House and the Senate. Stock futures sank overnight and then reversed higher ahead of the opening bell, with winners and losers already emerging across sectors. Eric Criscuolo, Market Strategist at the New York Stock Exchange, describes what traders on the floor are saying and why the scale of the result was expected even if the swings were not. He also looks at AI and data centre stocks, health care, Treasury yields and the deficit, and whether the usual post midterm strength in equities could return this year.
Get the latest news and updates on FINTECH.TV
Wall Street Reacts to a Democratic Sweep as Futures Swing From Losses to Gains
What are you hearing from traders on the floor this morning, and what is the view on futures?
The strength of the Democratic win was not out of the blue. It was pretty expected. It was just the degree to which they would beat the Republicans. It is coming in at the higher end of a beat, a pretty dominant win, but the Street was prepared for that no matter what metric you looked at, so it is not a shocking surprise. The knee jerk reaction was that futures traded substantially lower overnight, but as the night wore on they rallied, and we are now up. It is a big reversal, like cooler heads prevailed. S&P 500 futures approached their 200 day moving average and then rallied above it. We are seeing these big swings as the market digests everything. Nobody was unprepared. The question now is what happens as the Democrats take over in January, especially on the policies on the AI side, which have been driving the markets.
Which sectors are moving the market, and why?
The AI trade, the data centres and the companies that supply and construct them are weak right now, but they have also been weak for the past month or so. Whether you call that a cooling off period or traders getting ahead of this result and a potential slowdown in the AI build out, it was certainly happening in front of everything. Health care is bouncing. We could get better payouts to some of the managed care programmes and Medicaid, so a lot of the big health organisations tied to Medicaid spending could see a bump. For pharmaceutical companies it is more of a black box. Will the Democrats try to rein in drug pricing more than has already been tried? We will see, because a lot of things have to shake out and we have to see what the policy agenda will be.
What are Treasury yields telling us about what investors expect for spending and the deficit?
They got to pretty juicy levels where they probably attracted inflows, because a lot of investors could not say no to that yield level to lock in for two, ten or 30 years. The high levels themselves were a mitigating factor, because they attracted more demand. When rates were rising, it was because everyone was worried about the data centre build out, with all these companies raising so much capital in the debt markets and putting more supply into the market, which pushed yields higher. Now maybe there is a rethink of how much spending there will be on the build out, at least in the near term, so yields are moving lower a little, on the thought that the debt may not be as much as we thought. However, the fiscal deficit is still soaring, and the government is not going to stop raising money through Treasury offerings. Yields are down off their highs, but to move meaningfully lower there probably has to be a recession or an economic downturn, and we do not see that in the near term. The economy is doing pretty well, corporate profits are high and earnings have been good.
The Nasdaq 100 slipped into a correction this week. Does the election make things harder for tech, or is it a buying opportunity?
I am not a political pundit, but from what I have seen and heard from others, it is not a hostile environment. They are not going to rip out things that are already in place. There was just a feeling of, let's take a pause, let's not rush to build these things, let's work together with local opposition rather than pile in and build wherever we can. So there might be a slowdown, and these build outs might not happen as quickly as people thought. On the other hand, a lot of that was not happening right away anyway, so that was already in play.
Historically stocks have done well after midterms once the dust settles. Do you expect that to hold?
November has been a very strong month for equities for a long time, and then there is the Santa Claus rally at the end of the year. We are pretty much there already. It is a very strong part of the season for equities, and we will see if it happens. We could get a tech rally, because we have sold off a lot in those names. With finality now in, we know what happened and it is no longer an overhang. I would not be surprised if stocks are stronger at the end of the year.