- Democrats have a 66% chance of sweeping Congress, per JPMorgan's analysis
- A Democratic sweep may cause S&P 500 to move between -0.25% and +0.5%
- Split Congress could boost equities, with S&P 500 rising 0.5% to 1%
Democrats sweeping the US Congress may be the most likely outcome of the upcoming midterm elections today, but it might not deliver a major boost to Wall Street and US stocks. JPMorgan, in a recent note, sees a 66% chance of a 'blue wave', but its market projections suggest that investors could respond with limited eise or even a marginal decline in the S&P 500 index.
In its analysis of possible election outcomes, JPMorgan mapped four scenarios and their potential implications for Wall Street, with a Democratic sweep of the House of Representatives and the Senate being viewed as the most uncertain outcome for stocks, with S&P 500 expected to move in a narrow range - from a 0.25% decline to a 0.5% gain.
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However, a split Congress, with Democrats controlling the House and Republicans retaining the Senate, can be more favourable for equities. In this scenario, JPMorgan estimates that the S&P 500 could rise 0.5% to 1%, as legislative gridlock limits the scope for major policy changes.
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JPMorgan sees an even stronger market response if Republicans retain control of both chambers. In that event, the S&P 500 could gain 1% to 1.25%, as that would result in the absence of fresh regulatory risks. The least likely outcome, which is Republicans winning the House while Democrats control the Senate, could still see the index rise 0.25% to 0.75%.
Why A Blue Sweep Might Not Be Best For US Equities
JPMorgan says that a Democratic sweep can bring higher policy and regulatory uncertainty, which includes potential implications for the artificial intelligence sector, and that this may weigh on sentiment, even if the election outcome does not immediately result into major legislative changes.
However, JPMorgan says that the election result is unlikely to be the biggest determinant of market returns; Corporate earnings, economic growth, inflation and the Federal Reserve's interest-rate decisions are more likely to matter more.
The firm also expects around 37% earnings growth over the next 12 months and sees the US economy expanding at roughly 2% through 2027. A strong capital expenditure cycle, led by AI infrastructure, is another potential source of support.
Credit markets could also get some relief if the Federal Reserve raises interest rates less aggressively than investors currently expect, as a softer rate trajectory could support equity valuations by easing pressure on discount rates.
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