Goldman Sachs: Pre-election hedge unwinding drives market rebound, declining political uncertainty compresses market risk premium

November 4 — After the U.S. midterm election results were released, Democrats regained control of both chambers of Congress, but U.S. stocks rebounded quickly after a brief decline. Nasdaq 100 futures fell as much as 2.4% on election night before turning positive and rising 0.9%, rebounding about 929 points from the intraday low; S&P 500 futures rose about 1%, and Dow futures rose about 700 points.

Analysts at Goldman Sachs and Deutsche Bank believe that this rebound was mainly driven by the unwinding of hedges concentrated before the election once the results became clear, while the decline in political uncertainty also compressed the market risk premium. Goldman Sachs believes that valuations in the AI infrastructure sector had already contracted significantly, and a short-term pullback in volatility could further support equities.

However, market concerns about AI investment have not disappeared. Gina Hinojosa, Texas governor-elect, said she will not lift the freeze on data center construction permits until a more comprehensive regulatory framework is introduced, which could delay several gigawatts of computing capacity originally scheduled to come online in 2027 until 2028.

Deutsche Bank, meanwhile, regards the U.S. debt ceiling issue that may be triggered in the second quarter of next year as an important policy risk. Whether Republicans can complete a debt ceiling adjustment before the new Congress takes office in January next year will affect subsequent fiscal policy uncertainty. Analysts believe that this rebound mainly reflects position adjustments and a compression in the risk premium, while data center construction permits, AI infrastructure investment, and debt ceiling negotiations are the key tests the market will need to face next.