Elections often bring about what the market dislikes the most: uncertainty.
In just over a month, Americans will participate in mid-term elections to determine which party will control Congress during the remaining term of Donald Trump's presidency. Given that Trump's second term has been characterized by significant policy fluctuations, Wall Street is closely monitoring the election results and their potential impacts.
Historically, mid-term elections tend to result in a stalemate, with each of the two parties controlling one of the two chambers of Congress. Wall Street usually favors such an outcome, as it leads to "continued trading," with investors flocking to assets that have already performed well.
JPMorgan Chase considers this a possibility, but its strategists are also paying attention to two other outcomes, both of which could have a significant impact on the market.
Strategists Dubravko Lakos - Bujas wrote in their report to investors: 'In the 2024 presidential election, it will be easier to depict the impact of potential policy priorities on various sectors, industries, themes, and factors on the stock market. However, with the upcoming mid-term elections, the effects on the stock market under different outcomes may be more subtle and more conducive to stock picking.'
The following are the investment strategies corresponding to the three election results that Lakos-Bujas and his team are paying attention to.
Scenario One: Congressional Stalemate
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Maintaining the status quo is usually a more moderate outcome for investors.
If there is a split control in the House of Representatives or the Senate, it will be difficult for the White House to pass most legislation. This is good news for those who are concerned about excessive government spending, stricter regulations, or significant tax increases.
Lakos-Bujas points out: 'Since 1950, congressional deadlocks have been associated with positive returns of the S&P 500 index, whether measured on election days (with a deadlock resulting in a +21% return over a two-year congressional term, and +18% return with single-party control) or at the beginning of a new congressional term (with a deadlock resulting in a +25% return, and +18% return with single-party control).'
His team believes that defense contractors, healthcare companies, and some tech stocks that have not been deeply involved in the boom of AI data center construction will benefit the most; if the Democrats win control of either chamber of Congress, this construction boom could slow down.
Some representative companies of JPMorgan Chase in a stalemate scenario include:
- ExxonMobil ( Exxon Mobil )
- Home Depot ( Home Depot )
- Ford ( Ford )
- Alphabet
- SpaceX
Scenario Two: The Blue Wave
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The market strongly predicts a Democratic wave in November, with the current probability on Polymarket approaching 88%. This platform defines a “blue wave” as Democrats gaining more than 218 seats in the House of Representatives and more than 49 seats in the Senate.
However, JPMorgan Chase stated that this does not necessarily mean that policies will be completely reset.
Lakos-Bujas indicates that: 'The Blue Wave will not fully implement the Democratic agenda, but is more likely to make marginal changes to the policy landscape through funding negotiations, supervision, and efforts to maintain or revoke existing policies.'
Even so, his team still believes that healthcare stocks will benefit, as a Democratic-controlled Congress may reverse the cuts to Medicaid provisions in Trump's "Great American Deal" ( One Big Beautiful Bill Act, OBBBA ). They also believe that the blue wave is a bullish signal for the clean energy sector, especially renewable energy resources.
The stocks that analysts highlighted in the Blue Wave portfolio include:
- Salesforce
- Carvana
- NextEra Energy
- Xcel Energy
- CECO Environmental
Scenario Three: The Red High Wall
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Lakos-Bujas and his team believe that if the Republican Party continues to control both chambers of Congress, it would represent the most bullish scenario for tech stocks. Such a outcome could mean fewer obstacles to data center construction, which is also a focal point of attack by many Democratic candidates during their campaigns.
He added, "If the Republicans maintain control of Congress, this is likely to create the most favorable marginal federal policy environment for AI / infrastructure construction through continued policies, potential fiscal expansion, relaxed regulation, and faster federal approval."
However, they also believe that any companies that are expected to benefit from a more relaxed regulatory environment will be favored. If the Republicans maintain control, this should be beneficial for sectors such as traditional energy and nuclear power, finance, and defense, analysts say.
Some representative stocks in the red high-wall portfolio include:
- Bloom Energy
- United Health
- Lockheed Martin
- CoreWeave
- Bank of America
