AI trading is expected to make a comeback after the US midterm elections! Citadel Securities: Investors are waiting for the right time to re-enter the market

According to Zhitong Finance APP, Scott Rubner, Head of Equities and Derivatives Strategy at Citadel Securities, stated that as the U.S. midterm elections approach, investors are temporarily avoiding artificial intelligence (AI) related stocks, but this situation may reverse after the elections in November. At that time, as political uncertainty subsides, capital is expected to flow back into the AI sector, driving related stocks to once again outperform the broader market.

During an interview at the Citadel Securities Global Markets Future Conference in New York on Tuesday, Rubner said that investors generally view the U.S. midterm elections as a key inflection point for market risk repricing, and the AI sector may exhibit relative strength again after the elections conclude.

He pointed out that the message from institutional clients is quite clear: investors are willing to buy at higher prices in the future but are unwilling to take on additional risk before major political events take place.

The results of the U.S. midterm elections will provide clearer direction for AI regulation as well as other industry policies. If the Democratic Party manages to secure control of both the House and the Senate, Wall Street strategists expect relevant regulatory policies to become stricter, thereby exerting further pressure on semiconductor stocks.

Amid both political uncertainty and declining market risk appetite, AI-related stocks have recently seen notable sell-offs. Data shows that as of last Friday, the Philadelphia Semiconductor Index had fallen for eight straight sessions, with a cumulative drop of nearly 16%. Meanwhile, the tech-heavy Nasdaq 100 fell 5.5% last week, and the S&P 500 also performed weakly.

Rubner's assessment echoes recent views from Bank of America strategist Michael Hartnett. Hartnett previously predicted that, given rising interest rates and persistently high inflation, investors would seek safety and reduce exposure to high-risk assets in the weeks leading up to the U.S. midterm elections.

However, despite the evident pressure on tech stocks, the major U.S. stock indexes remain near relatively high levels overall. As of Monday's closing, the S&P 500 was still hovering near its all-time high, and the Nasdaq 100 was only about 5% off its October 6th peak.

It is worth noting that retail and institutional investors have shown a clear divergence in their behavior during the recent market correction. Rubner said that retail investors continue to actively buy on dips. Last week, retail buying in semiconductor stocks, new cloud service providers, and storage chip-related stocks reached the highest level in 16 weeks, demonstrating that individual investors still have confidence in the long-term growth prospects of the AI industry.

In contrast, institutional investors continue to deleverage and reduce risk exposure. This divergence in capital flow indicates that although some investors see the recent correction as a buying opportunity, large institutions still prefer to remain cautious before the midterm elections.

Rubner further noted that the recent sell-off in the AI sector is not an isolated incident but part of a broader market style rotation since the second half of the year. From January 1 to June 22 this year, momentum investing strategies—buying strong performers and selling weak ones—had a cumulative return as high as 70%. However, as the market style reversed, the performance of this strategy deteriorated noticeably and is now negative for the year.

The AI sector itself has also experienced similar changes. In the first half of this year, the top-performing AI stocks outperformed lagging ones by more than 100%, but this relative return has since also reversed.

Rubner believes this reflects the market going through a large-scale unwinding of popular trades. Previously highly concentrated funds are gradually loosening, and investors are reducing holdings in high-flying tech and AI concept stocks.

However, he does not believe that the recent correction signals the end of the AI investment theme. On the contrary, with the key political event of the midterm elections behind, market assessments of regulatory prospects will become clearer, and institutional investors may once again increase their risk exposure.