JPMorgan lays out the investing playbook for 3 midterm-election scenarios

Markets tend to hate the uncertainty that comes with a general election.
Partisan gridlock would likely be the best case scenario for Wall Street, JPMorgan says.
The impact to the stock market will be "more nuanced" than in previous elections.

Elections tend to bring something that the market hates: uncertainty.

In just over a month, Americans will vote in the midterms, deciding which party gets to control Congress for the rest of Donald Trump's term. Given the policy roller coaster that's already been a defining characteristic of Trump's second stint in office, Wall Street is laser focused on the outcome and its potential impacts.

Historically, midterms often bring gridlock, with each party controlling one of the chambers of Congress. This tends to be an outcome Wall Street likes to see, leading to a continuity trade as investors pile into what's already been working.

And while JPMorgan sees that as a possibility, its strategists are eyeing two other outcomes, both of which have major implications for markets.

"In the 2024 presidential election, it was easier to map the equity impact of potential policy priorities across sectors, industries, themes and factors," wrote strategist Dubravko Lakos-Bujas in a note to investors. "However, the equity impact for the upcoming midterms across election outcomes scenarios will likely be more nuanced and favor stock picking."

Here's the election playbook for three election results Lakos-Bujas and his team are eyeing.

Scenario 1: Gridlock

How to trade it

A continuation of the status quo tends to be a benign outcome for investors.

The possibility of a divided house or senate would make it extremely difficult for the White House to pass most legislation. That's good news for anyone worried about excessive government spending, stricter regulation, or sharp tax increases

"Congressional gridlock has been associated with positive S&P 500 returns since 1950, whether on an election date basis (+21% gridlock vs. +18% Single Party Control over 2-year Congressional term) or start date of the new Congress (+25% Gridlock vs. +18% Single Party Control," Lakos-Bujas noted.

His team sees the most benefit for defense contractors, healthcare companies, and some tech stocks that aren't heavily exposed to the AI data center buildout, which may be stalled if Democrats take either branch.

Some of the notable names in the bank's gridlock basket include:

SpaceX

Scenario 2: Blue Wave

How to trade it

Prediction markets are strongly favoring the possibility of a Democratic wave in November, with odds currently hovering at close to 88% on Polymarket, which defines a blue wave as Democrats taking more than 218 seats in the House of Representatives and more than 49 seats in the Senate.

However, that doesn't necessarily mean a total policy reset, the bank said.

"Rather than enabling a broad Democratic agenda," Lakos-Bujas stated, "a Blue Wave would likely shift the policy landscape at the margin through funding negotiations, oversight and efforts to preserve or unwind existing policies."

That said, his team sees healthcare stocks benefitting, as a Democratic congress could reverse the Medicaid cuts contained in Trump's One Big Beautiful Bill Act (OBBBA). They also see a blue wave as a bullish indicator for the clean energy sector, specifically for renewable energy resources.

Here are some of the stocks the analysts highlight in their blue wave basket:

Scenario 3: Red Wall

How to trade it

Lakos-Bujas and his team see Republicans holding on control of both chambers of Congress as the most bullish scenario for tech stocks. The result would likely mean fewer obstacles for the data center buildout, a flashpoint of the election that many democratic candidates have campaigned against.

"If Republicans maintain control of Congress, that would likely provide the most supportive incremental federal policy backdrop for the AI/Infrastructure buildout through policy continuity, potential fiscal expansion, deregulation and faster federal permitting," he added.

However, they also see strong benefit for any companies that stand to gain from a looser regulatory environment. If Republicans maintain control, that should benefit sectors including traditional energy and nuclear power, financials, and defense, the analysts said.

Here are some of the notable stocks in the red wall basket:

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