We went into the midterm elections expecting the weakness ahead of this known risk event to give way to a relief rally once the uncertainty was removed.
Wednesday delivered exactly that, and in a big way.
The Dow surged 3.0%, its best day since April 2025 and reportedly its strongest post-midterm performance since 1982. The S&P 500 and Russell 2000 each gained 1.6%, while the Nasdaq Composite advanced 1.4%. Notably, the Nasdaq-100 lagged with a gain of just 0.9%, reflecting continued weakness in semiconductors and AI-related stocks. However, it was still a comeback of sorts since Nasdaq 100 futures recovered from a 2.4% overnight drop.
Nine of the S&P 500’s 11 sectors finished higher, led by Consumer Discretionary and Financials.
The election was the catalyst, but there was more behind the advance than political relief. Crude oil plunged 8.3% to $88.23, extending its weekly decline to more than 15%, as investors anticipated easing tensions with Iran. The 10-year Treasury yield fell below 5% to 4.89%. Lower energy costs and borrowing rates could provide important tailwinds for consumers, businesses, and the broader stock market if these trends continue.
There were also encouraging developments beneath the surface.
Financials, Health Care, and Consumer Staples all established record highs, and homebuilders surged nearly 8%. That’s important because the market doesn’t necessarily need its former leaders to recover immediately for the broader advance to continue. New leadership can carry the market higher.
The equal-weighted S&P 500 (RSP) reached its bear-trap reversal target Wednesday and closed at a new all-time high. That’s an especially encouraging development because it shows the rally is broadening beyond a handful of mega-cap stocks. We’ve been looking for improved market breadth, and we’re finally seeing it!
Leadership That Won’t Stay Put
Look at the past month. We’ve seen concerns about AI capital spending, a rotation into equal-weighted stocks, and sharp declines in many AI beneficiaries. Wednesday’s expected post-election rally accelerated that rotation, with financials, consumer stocks, and other previously overlooked groups taking the lead. Just when you think you have the market figured out, leadership changes again.
The most interesting divergence Wednesday was within technology.
Companies building and supplying data centers were hit hard on fears of tighter regulation and slower construction. Semiconductors declined 3.1%, with some infrastructure suppliers suffering double-digit losses. Meanwhile, Microsoft, Amazon, Apple, and Alphabet rallied sharply.
Investors appear to be reconsidering where the profits from AI will accumulate. Slower infrastructure expansion could improve hyperscaler cash flows and strengthen the advantages of their existing facilities. But it could also delay orders and raise costs for the companies supplying the enormous construction pipeline.
That doesn’t mean the AI infrastructure boom is ending. Demand for computing power remains substantial, and no nationwide construction prohibition has been enacted. The more immediate questions involve project timing, financing, and profitability.
CoreWeave offers an important warning. Its bonds fell to new lows Wednesday, with some obligations reportedly yielding more than 15%. The market isn’t necessarily rejecting AI demand. It’s becoming more selective about who can finance the massive investments required to meet it. Strong balance sheets, cash flow, and access to capital may become increasingly important differentiators.
Fortunately, there were also encouraging developments after the close. Coherent reported nearly 50% revenue growth and initially rallied about 8%, while AppLovin surged roughly 24% following strong earnings and cash flow. Coherent’s results were particularly interesting for the optical networking group, even though you can’t tell it by the continued free fall in shares of Lumentum!
If these earnings gains hold and relative strength improves, we could see attractive opportunities emerge even before the broader technology sector recovers.
For a small-cap stock picker, these rapid leadership changes can be frustrating.
Good positions get shaken out by volatility that has little to do with the underlying companies, making it difficult to establish positions and stay with them. That’s why I’m particularly interested in seeing sustained momentum rather than another series of short-lived rotations.
Two Charts, Two Very Different Reversals
One of Wednesday’s most interesting developments was the contrasting technical action in the SPX and Nasdaq-100. Both had experienced significant selling, but their reversal patterns are telling different stories.
The SPX may have trapped the bears, while the Nasdaq-100's attempt to reclaim its broken neckline was sold. What happens next could tell us a great deal about the strength and staying power of this post-election rally.
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