Wall Street expects a post-election rebound, but BTIG pours cold water: Midterm elections may be the 'starting point for a decline' rather than a 'starting point for a rebound'

English Finance APP has noted that Wall Street investors expecting a post-midterm election rally in November may be disappointed. BTIG strategist Jonathan Krinsky believes that as credit conditions worsen and several sectors show signs of weakness, the risk of a stock market decline is rising.

In a research report on Sunday, Krinsky stated that the S&P 500 Index could fall back to around 7,300, close to its 200-day moving average and summer lows. This represents a decline of about 4.3% from the recent 7,631 level. If it breaks below this technical support, the benchmark index could see further downside.

This warning challenges the widely held expectation that "the stock market will rise after the uncertainty of the November 3 election subsides." Historically, midterm elections have often marked a turning point for the stock market, but Krinsky believes this year's exceptionally strong market performance reduces the likelihood of history repeating itself.

BTIG data shows that since 1962, the average maximum drawdown for the S&P 500 Index during June to December of midterm election years was 13.76%. This year, the maximum drop since June 1 has been just 4.5%, making it the second smallest drawdown for this period.

Krinsky wrote: "The reason the stock market usually performs well in November of midterm election years is that the S&P 500 has typically been weak before the election. This year’s situation is exactly the opposite."

The strategist stated that the S&P 500 Index has also deviated from its historical seasonal patterns at other points this year, indicating that investors should not automatically assume the election will be a catalyst for further gains.

He wrote: "Despite the market consensus expecting a rebound after the midterms, we actually believe the opposite scenario is more likely."

Warning Signals from the Credit Market

One of Krinsky’s main concerns is the widening spread between low-rated corporate bonds—a change that often signals mounting financial stress before it is reflected in stock prices.

According to BTIG data, the spread between B-rated and CCC-rated bonds has reached about 7.8 percentage points, a level seen only four times since 1996.

In each of those instances, the S&P 500 Index had already fallen at least 11.8% from its 52-week high. In two cases, when credit spreads reached similar levels, the benchmark index was down roughly 30%.

The current divergence is notable because the S&P 500 Index is still only about 2% below its recent highs. Krinsky wrote: "So either 'this time is different,' or the S&P 500 may be about to face a tough downhill stretch."

For investors, this disconnect raises the question: have equity valuations adequately reflected the deterioration in credit conditions? Widening spreads may indicate growing worries about corporate borrowers’ ability to repay, which could signal tighter financing conditions and weaker economic activity.

Krinsky also pointed to increasing strain in the tech credit market. The credit default swap spreads of major hyperscale computing companies have continued to widen, and investment-grade tech bond spreads are at their highest since 2022.

This deterioration has occurred while the S&P 500 technology sector is still only a few percentage points off its all-time highs.

The private credit market also shows similar weakness. Business Development Companies (BDCs)—institutions providing financing to businesses outside traditional bank lending channels—have fallen to multi-year lows and have struggled to rebound.

Semiconductor Weakness Contrasts with Software Strength

After recent failed attempts to rebound from technical support, Krinsky remains bearish on semiconductor stocks.

Although the iShares Semiconductor ETF and VanEck Semiconductor ETF remain above their 200-day moving averages, the equal-weighted SPDR S&P Semiconductor ETF has already fallen below this level.

Krinsky wrote: "We still believe semiconductor stocks will continue to trend lower over the coming weeks and even months."

However, software stocks are a potential bright spot. An equal-weighted software index has broken out of a two-year trading range, with its relative strength versus the broader market at a yearly high.

The ratio of equal-weighted software stocks to equal-weighted semiconductor stocks has also broken out of a year-long trading bottom, suggesting leadership within the tech sector may be shifting.

Discussing software stocks, Krinsky wrote: "If you're looking for momentum, this is the entry point."

This divergence suggests investors may need to be more selective within the technology sector instead of treating the entire sector as a single trade.

Lack of Investor Panic Adds to Concerns

Krinsky also questioned whether the market has undergone enough selling pressure to form a lasting bottom.

The put/call ratio in the options market remains far below levels seen during stressed periods in March and July, indicating that investors have not been actively buying protection against further declines.

He wrote: "In the absence of hedging, it is difficult to argue that we have seen a meaningful low."

Market breadth offers another warning sign. This year, about 33% of trading days have seen the S&P 500 Index move in the opposite direction to market breadth—that is, more stocks fell as the index rose, or vice versa.

Historical analysis by BTIG suggests such persistent divergence is unlikely to continue indefinitely.

Several economically sensitive industries also appear vulnerable. Krinsky noted technical weakness in sectors such as industrials, healthcare, dining, airlines, and gaming.

The report highlighted Mexican fast-food brand Chipotle Mexican Grill (CMG.US), whose stock price has fallen back to levels last seen in 2022. BTIG alone maintains a "Buy" rating and a $45 price target for this restaurant chain.

Overall, weakening credit indicators, deteriorating market breadth, and technical breakdowns across multiple sectors all suggest investors may be underestimating the risk of a broader correction.

Rather than ending market uncertainty, the midterm elections may coincide with a new wave of selling pressure—especially as the S&P 500 approaches its 200-day moving average along with other major market sectors.