JPMorgan maps stock market scenarios for U.S. midterm election outcomes

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JPMorgan stock midterm scenarios

Highlights

JPMorgan assigns a 66% probability to a Democratic sweep, anticipating the S&P 500 could move between down 0.25% and up 0.50%, with possible AI stock selloff on regulatory fears.
A split Congress (26% likely) could see the S&P 500 rise 0.5% to 1%, while a Republican sweep (7% likely) may boost stocks 1% to 1.25% due to minimal regulatory risk.
Democratic control scenarios could lower long bond yields via reduced deficit spending, while a Republican Congress may lift yields on greater fiscal expansion and trigger difficult budget negotiations.

Election scenarios and market expectations

As reported by CNBC, JPMorgan expects the stock market to react differently depending on which party emerges with control of Congress after Tuesday's vote.

The bank assigns a 66% likelihood to a Democratic sweep of both the House and Senate, a scenario in which the S&P 500 could either fall 0.25% or rise 0.50%. JPMorgan says that outcome could trigger a selloff in artificial intelligence stocks if investors fear tighter regulation of data centers and technology companies, although it adds that any bill aimed at limiting AI expansion would be unlikely to overcome a Trump veto. The firm says traders should buy any dip in technology shares.

JPMorgan gives a 26% probability to a split Congress with Democrats controlling the House and Republicans the Senate. In that case, the S&P 500 could rise 0.5% to 1% as investors welcome legislative gridlock, which would leave neither party with enough power to advance major policy changes or increase spending.

A Republican hold on both chambers, described as a red wave, carries a 7% likelihood in JPMorgan's analysis. That outcome could lift stocks by 1% to 1.25% because it introduces no new regulatory risks, while a Republican House paired with a Democratic Senate is seen as the least likely result at 1%, with the S&P 500 projected to rise 0.25% to 0.75%.

Implications for bonds, regulation and business risk

Beyond equities, JPMorgan says a Democratic sweep or a split Congress led by a Democratic House could reduce longer-dated bond yields because Democrats would control government finances. Lower yields would support bond prices, while reduced deficit spending could also shape broader market sentiment.

The bank also says a blue wave raises the risk of investigations into business leaders connected to donations to Trump. That risk remains under both split-Congress outcomes because either the House or the Senate would still retain investigative authority.

Under a Republican hold on Congress, JPMorgan says longer-dated bond yields could move higher if deficit spending keeps increasing. The bank adds that a divided government with a Republican House and Democratic Senate could produce difficult budget negotiations and possible government shutdowns.

Whatever the final result, JPMorgan says Tuesday's election should give traders a clearer policy backdrop, which the market has been lacking ahead of the vote.

Our earlier article on rising U.S. Treasury yields and the swelling federal deficit explained how long-term borrowing costs above 5% are feeding into higher mortgage rates and mounting interest expenses as annual deficits near $2 trillion. It also noted that a likely divided government after the midterms could limit the chances of a near-term fiscal deal, keeping pressure on yields and tightening financing conditions across the economy.

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