The midterms are here. How JPMorgan expects the market to react
The U.S. midterm elections are finally here, and there’s a good chance the stock market could rise afterward, according to JPMorgan. The Wall Street firm crunched the numbers on what’s most likely to happen following Tuesday’s election, and how stocks are likely to react. History shows that both midterm and presidential elections are positive for stocks, with a recent CNBC analysis showing the same, but the possibility of a blue wave, Republicans holding on or a split Congress carry different implications for equities. Here are the possible outcomes: Blue Wave — This has a 66% likelihood, with the S & P 500 falling 0.25% or rising 0.50%. Split Congress (Democratic House, GOP Senate) — This has a 26% likelihood, with the S & P 500 gaining 0.5% to 1%. Red Wave — This has a 7% likelihood, with the S & P 500 climbing 1% to 1.25%. Split Congress (GOP House, Democratic Senate) — This has a 1% likelihood, with the S & P 500 rising 0.25% to 0.75%. Blue Wave The most expected outcome with a 66% likelihood is one in which Democrats sweep both the House and the Senate. The S & P 500 could fall 0.25% or rise 0.50%, as a result. A Blue Wave could mean a selloff in artificial intelligence stocks, if it means greater regulation of datacenters and tech companies, as feared. But JPMorgan expects any bills that limit AI expansion would be unlikely to overcome a Trump veto. The firm said traders should buy any dip in tech stocks. It could also mean a reduction in deficit spending, given that Democrats will control government finances, meaning longer-dated bond yields could also come down and bond prices rise. It also raises the likelihood of an ‘investigation risk’ into business leaders connected to donations to Trump. Split Congress (Democratic House/GOP Senate) There’s a 26% likelihood of a split Congress, giving Democrats control of the House and Republicans the Senate. In that scenario, the S & P 500 might rise 0.5% to 1%, JPMorgan said, relieved at the prospect of legislative gridlock and leaving neither party with enough power to push policies or in increase spending. However, it would still mean a decline in longer-dated bond yields, as Democrats control government finances. Investigation risk for certain business sectors and leaders also would remain. Red Wave A continuation of the status quo — by which the Republicans still hold the House and Senate — has only a slim chance of occurring, a 7% likelihood. In that scenario, however, stocks could rally 1% to 1.25%, as it introduces no new regulatory risks, the firm said. It could also result in Trump continuing his war with Iran, and may also mean a move higher in longer-dated bond yields with ever higher deficit spending. Other split Congress (GOP House/Democrat Senate) The slimmest possibility following Tuesday’s election is a GOP-controlled House with a Democratic Senate, a scenario JPMorgan gave just a 1% probability. In this case, the S & P 500 rises 0.25% to 0.75%. This split Congress would also mean legislative gridlock, which could mean tough budget fights and possible government shutdowns. Investigation risk also remains, as the Senate holds investigative powers. Whatever the outcome, one way or another Tuesday’s elections will give traders much needed certainty.
