As investors gear up for U.S. midterm election results, trading volumes have quieted, with many market participants taking a “wait and see” approach. Activity on UBS’s High Touch (HT) desk has tilted toward buying, especially among long-only investors, but overall volumes are subdued. Meanwhile, many investors have dialed back activity, reflecting a shift in election expectations as well as anticipation of major upcoming events, including the Federal Open Market Committee (FOMC) meeting and China’s latest economic stimulus measures.

Election Expectations Shape Market Sentiment

With only hours until results start rolling in, sentiment on the trading floor reveals investors are positioning with caution. There has been a notable drop in overall U.S. composite trading volumes, particularly as some high-activity but low-value stocks (like ELAB, BNOX, and BJDX) continue to skew the averages. Below the surface, investor expectations for election outcomes are impacting sector flows. Currently, a Republican win is seen as favorable for equity markets, especially as a Democratic sweep is not broadly anticipated. While market reactions are still speculative, many investors are cautiously optimistic about a year-end rally, assuming election-related uncertainty and other major macro risks are soon cleared.

Market Trends: A Surge in Tech, Utilities Bounce Back

Within the HT desk’s flow, Monday’s market movements have partly reversed, with “Trump trade” stocks, artificial intelligence (AI) leaders, and mega-cap tech stocks leading upward momentum. Utilities are also making gains, underscoring the potential for momentum-driven outperformance as the market sorts through election expectations. Among single stocks, dispersion is still limited, but the desk expects an uptick in individual stock activity within the next 48 hours as the FOMC and election results become clearer and Smidcap earnings reports roll in. At the sector level, investors are increasingly selling technology stocks, consumer products, and REITs, while buying has shifted toward telcos, utilities, and energy.

Anticipated Action in the Hours Ahead

Conversations across the trading desk largely center around two questions: what to expect from market movements over the next two days, and which trading vehicles offer the best flexibility amid potential headline shocks. Futures trading is expected to lead the charge, providing quick response options to breaking news. As for election coverage, early returns could give some indication, but it’s likely markets won’t see a definitive outcome before Wednesday morning at the earliest.

Cash on the Sidelines: Opportunity Amid Valuation Concerns?

With equity valuations on the high side, some investors are wary, yet UBS sees significant cash reserves ready to be deployed if volatility drops after the election and FOMC announcements. As these major macro uncertainties begin to ease, there may be notable buying opportunities, particularly below the surface in sectors that have been temporarily sidelined or overlooked.

Markets appear poised for a cautious but optimistic stance going into election results. A Democratic sweep might create the largest market reaction, but other scenarios could very well drive a rally as year-end approaches, with macro concerns resolved and new opportunities emerging across sectors.