A group of strategists on Wall Street had previously bet that there would be a short-term sell-off in the stock market after the U.S. midterms, providing investors with an opportunity to buy stocks at a discount.

On Thursday, the market decline far exceeded their expectations. Now, they are urging clients to seize this opportunity.

"The next two to three weeks are exactly the time when one should increase risk exposure," said Mike Wilson, Morgan Stanley's chief U.S. equity strategist.

The fierce selling on Thursday took Wilson by surprise, just like everyone else. Due to market concerns that the Democrats gaining more power would slow down the advancement of artificial intelligence, the S&P 500 index fell by 4.4%, and the Nasdaq 100 index tumbled by 6.4%.

However, Wilson still believes that the U.S. stock market is expected to rebound and maintains the target of the S&P 500 index reaching 8,000 points by the end of the year, which means a rise of 8.4% from Friday's closing level.

Investors returned to the market on Friday, driving the S&P 500 index up by 0.3%. However, since the voting concluded on Tuesday, the index has still fallen by a cumulative 2.5%. The Democratic Party gained control of both the Senate and the House in the midterms, as well as won elections in state legislatures and for governors in several states across the country. Many of the victorious candidates have pledged to limit data center development and strengthen regulation.

Wilson and many of his Wall Street peers believe that this sharp decline indicates that the selling pressure on the S&P 500 index over the past few weeks is coming to an end, rather than suggesting that AI trading is collapsing, which would be a sign that there will be more pain ahead for the market.

"We have indeed experienced a AI bubble, and I think that bubble is starting to deflate," said Yardeni Research, the chief investment strategist of Ed Yardeni, in an interview on Thursday. "The bursting of a bubble would mean a significant negative impact on the economy, and I don't think that will happen."

Wilson suggests that investors buy stocks targeting consumers, especially as interest rates and oil prices continue to fall. Yardeni is optimistic about healthcare stocks.

"I think this is a callback," Yardeni stated. He has a year-end target of 7,900 points for the S&P 500 index. "I had anticipated buying opportunities after the election, and I think we have already begun to see some quite good ones."

Caught off guard

Many trading desks on Wall Street had previously advised clients to return to the market after the election, so the sharp drop on Thursday caught them off guard. Investors initially welcomed the election results, with the S&P 500 index rising by 1.6% on Wednesday.

"Investors have considerable room to increase their risk exposure again," wrote Scott Rubner, head of equity and equity derivatives strategy at Castle Securities, in a report to clients on Wednesday. "As uncertainty diminishes and some of the largest buyers in the market re-enter the market, we believe that the direction with the least resistance for U.S. stocks before the end of the year is still upward."

However, as of the close on Thursday, the market value of the S&P 500 index had evaporated by $3 trillion.

However, most strategists have not wavered as a result. Data compiled by Bloomberg shows that their current average year-end target for this index is 7,973 points.

"The market has made slight adjustments due to the election results, and it would be unwise for investors to choose to leave now," said Jonathan Golub, the chief stock strategist at Seaport Global Holdings. He expects the S&P 500 index to reach 8,200 points by the end of the year. "I am undoubtedly a buyer."

A major obstacle to the rebound of the S&P 500 index will be the continued weakness in AI trading. During this bull market that has lasted for four years, AI trading has been an important force driving up the index for most of the time.

The Philadelphia Semiconductor Index tumbled 12% on Thursday, still down 36% from its June high.

"Semiconductor stocks and AI infrastructure transactions, which have truly driven the market up so far this year, will continue to face pressure," said Ohsung Kwon, chief equity strategist at Fidelity. "If the market is to rise significantly from its current level, high-beta transactions will need to contribute."

However, Kwon indicates that if concerns about the slowdown in infrastructure construction related to AI continue, then tech giants such as Google's parent company Alphabet and Amazon may actually provide some upward support for the market. These companies have previously caused concern among investors due to their heavy investments in AI technology, and the market might expect them to be forced to cut spending. Kwon has a target of 7,700 points for the S&P 500 index.

"We don't want to be too pessimistic at this time," he said.