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- While polls have suggested that a “blue wave” is in reach for Democrats this November, the stock market isn’t so sure, Evercore ISI said in a note on Tuesday.
- Wall Street strategists have said a blue wave could help spur a surge in value and cyclical stocks.
- But Evercore said this week’s rotation out of value and into tech suggested that a blue wave is less likely.
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Wall Street is increasingly expecting a so-called blue wave for Democrats this November, which would likely lead to a reflation trade: a surge in cyclical and value stocks at the expense of technology and growth stocks.
But recent trading activity in the stock market suggests a blue wave is less likely, Evercore ISI said in a note on Tuesday.
Specifically, this week’s rotation out of small-cap and value and into large-cap and growth stocks could be chalked up to declining odds of a Democratic sweep, the note said.
The firm pointed to the October surprise in North Carolina’s Senate race between Republican Sen. Thom Tillis and the Democrat Cal Cunningham as evidence of the declining chance that Democrats will take control of the Senate.
“The Democratic ‘dream fiscal program’ odds are lower,” Evercore said of what’s driving the rotation back into tech.
The firm did concede that other factors could be moving tech stocks, including excitement about Amazon's Prime Day and Apple's iPhone 12 event as well as increased Federal Reserve support due to a steady rise in daily COVID-19 cases.
But it said one sector that had been representative of the chance of a Democratic sweep in recent weeks had begun to turn south: solar stocks.
Evercore pointed out that solar stocks had seen a steady rise as the odds of a Joe Biden presidency increased.
The Invesco Solar ETF (TAN) dropped 6% over the past week of trading activity, suggesting that investors might view a Biden presidency or blue wave as less likely than they did in recent weeks.
But it could also be that solar stocks are consolidating and digesting gains after a massive run. The exchange-traded fund is up 140% year-to-date.
Whether or not the stock market is sending signals about this November, UBS said there exists a risk that anything but a blue wave would be a disappointment for investors and lead to a market sell-off.
If too much optimism is priced in too soon, it could lead to a "perverse situation in which investors are disappointed if a Blue Wave doesn't happen," UBS said.