The year's most successful stock-market trades are unraveling - perhaps for good

By Joseph Adinolfi

One strategist expects a bumpy ride between now and the end of the year

The stock market's top trades of 2026 are coming undone.

Wall Street's top trades of 2026 are coming undone as a violent rotation rattles the U.S. stock market.

That could create problems for investors heading into the end of the year, Nomura's Charlie McElligott warned in commentary shared with MarketWatch on Thursday. Hedge funds and other sophisticated investors who have been burned by the abrupt turnaround might be more cautious about sticking their necks out once again, he noted, particularly as bonus season approaches.

McElligott highlighted two trades that had produced superior risk-adjusted returns for much of this year.

The first involved a "barbell" portfolio of semiconductor names and energy stocks, with barbell referring to a strategy of investing in two separate themes. The second entailed betting against shares of megacap technology companies like Alphabet (GOOGL) (GOOG), Microsoft (MSFT) and Amazon.com (AMZN), while betting on shares of chip makers and industrial and power firms who saw their revenues explode as the artificial-intelligence race fueled a massive investment boom.

Both of these themes had dominated other popular strategies earlier in the year, as a chart produced by McElligott and his team showed. But their recent struggles have intensified following Democrats' big wins in Tuesday's midterm election.

The situation has gotten so bad that both trades are nearing "round-trip" levels, where investors who have stuck with these strategies are on track to see most of their earlier returns evaporate.

"They're shooting the generals," McElligott said.

Semiconductors and other AI hardware names have been on a roller-coaster ride since the second half of 2026 began, after scoring monster gains during the first six months of the year. Energy stocks had also pushed consistently higher as the Iran war kept prices for crude oil (CL00) (BRN00) and other energy products elevated. Since the start of the year, energy stocks XX:SP500.10 have been the best performers in the S&P 500 SPX; the sector is up more than 40%, according to FactSet.

But crude-oil prices collapsed this week as investors bet that Democratic control of Congress could hasten the end of the conflict in Iran and the return of unfettered movement for tankers traveling through the Strait of Hormuz - a critical global chokepoint for the energy trade.

Meanwhile, Democratic victories in a handful of key governor's races have stoked concerns that increased scrutiny of data-center development could slow the AI buildout in 2027, potentially forcing Wall Street analysts to re-evaluate their lofty expectations for revenue growth for many of the beneficiaries.

In commentary published Wednesday, Citrini Research, a popular independent shop that was early to the AI theme, declared that the "end of the AI trade as we know it" had probably arrived. The firm recommended that investors shift their portfolios toward "boomer software" stocks, financials, entertainment and energy names.

Major U.S. equity indexes were getting hammered on Thursday, as investors dumped shares of semiconductor stocks, software names and members of the "Magnificent Seven" group of megacap stocks MAGS. The Nasdaq Composite COMP was down nearly 5% - on track for its worst daily showing since the April 2025 tariff tantrum.

-Joseph Adinolfi

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11-05-26 1123ET