Wall Street Strategists Call Stock Rout a Fresh Reason to Buy

(Bloomberg) -- A slew of Wall Street strategists were banking on a short-term selloff following the US midterm elections to give investors an opportunity to buy stocks at a discount.

On Thursday, they got far more than they bargained for. And now they're urging their clients to take advantage.

"This is the place where you should be adding risk over the next two to three weeks," said Mike Wilson, chief US equity strategist at Morgan Stanley.

Wilson was just as surprised as everyone else at the severity of the selling on Thursday that sent the S&P 500 Index down 4.4% and the Nasdaq 100 Index tumbling 6.4% due to concerns that newly empowered Democrats will slow the artificial intelligence build out.

Still, Wilson is confident that US stocks are poised for a rally, and he's sticking to his target for the S&P 500 to reach 8,000 by the end of the year, which would imply a gain of 8.4% from Friday's close.

Investors waded back into the market on Friday, sending the S&P 500 up 0.3%. But the benchmark is still down 2.5% since polls closed on Tuesday. Democrats won control of the Senate and House of Representatives, as well as numerous state houses and governor's mansions throughout the country. Many of the winning candidates pledged to check data center development and increase regulation.

The wipeout is evidence that the selloff in the S&P 500 in recent weeks is nearing an end, not a sign that the AI trade is collapsing, which would signal more pain ahead, Wilson and many of his Wall Street colleagues argue.

"We have had an AI bubble and I think the air is coming out of that bubble," Ed Yardeni, chief investment strategist at Yardeni Research, said in an interview on Thursday. "Bursting would mean that it would have significant adverse impacts on the economy, and I don't see that happening."

Wilson is recommending investors scoop up shares of consumer-focused stocks, particularly if interest rates and oil prices keep falling, while Yardeni likes healthcare stocks.

"I view it as a correction," said Yardeni, who has a year-end S&P 500 target of 7,900. "I anticipated buying opportunities after the elections, and I think we're starting to see some pretty good ones."