Big V or Little v?

The recent equity sell-off is likely a V-shaped correction and may offer an opportunity despite the risk of a deeper decline.

• The U.S. midterm election results triggered a rapid deleveraging move after markets had already weakened, with the S&P 500 falling about 6% from its October 6 high and the technology-heavy Nasdaq declining 12%.
• AI enthusiasm peaked in June, while third-quarter earnings failed to exceed elevated expectations for some major AI companies.
• The crowded trade of being long AI stocks and short defensive sectors such as health care and consumer staples appears to have unwound rapidly, alongside selling from CTAs entering systematic sell zones.
• The authors argue that the economy remains in very good shape, while technical conditions look oversold because the S&P 500 RSI has often provided attractive entry points when it touched or approached 30.
• Emerging-market valuations look cheap, and the S&P 500 at 18 to 19 times earnings is described as compelling relative to valuation troughs seen in recent years.

Takeaway: Purpose Investments views the political shock and systematic selling as an opportunity for investors with sufficient risk tolerance, while acknowledging that the correction could develop into a larger V.