JPMorgan says a split Congress after next month's midterms would favor the S&P 500 more than single-party control, pointing to decades of historical returns. Strategist Dubravko Lakos-Bujas named healthcare, defense and select tech stocks as the likely winners, while Fundstrat's Tom Lee argues the macro backdrop is already turning more supportive for risk assets.
Congressional gridlock has been associated with S&P 500 gains of 21% over the following two-year term since 1950, JPMorgan strategist Dubravko Lakos-Bujas wrote in a note Thursday. That compares with 18% returns when one party controls both chambers from election day. JPMorgan called the midterms, about a month away, one of the year's most anticipated political catalysts.
Gridlock favors healthcare, defense and tech
A split Congress would create limited downside policy risk, JPMorgan said, naming Gilead Sciences, Oracle, Meta Platforms and Sherwin-Williams as potential beneficiaries. Healthcare stands to gain because gridlock lowers the odds of Medicaid cuts, and defense names could benefit from bipartisan military and infrastructure spending. Certain large tech companies could also benefit from a lower probability of AI regulation.
JPMorgan noted some of that upside could be capped: the S&P 500 is already up about 60% from the start of the presidential cycle. Volatility also tends to build into the vote, with the VIX historically peaking a month before the election before stock performance turns positive in the months after.
Tom Lee expects a risk-on shift after the vote
Fundstrat's Tom Lee told CNBC the market could face a correction from mid-October through the midterms, but he expects crypto and technology stocks to benefit afterward. He argued that Democrats would likely become more supportive of data-center projects and the CLARITY Act once the new Congress takes shape.
He also pointed to a weaker case for the Fed's maximum-hawkish scenario, which had priced in three rate hikes and a 75% probability of an October increase. He sees softer inflation readings over the next six months as one-off factors roll off, which he said could let the Federal Reserve walk back its hawkishness and bond yields normalize. According to Crypto Briefing: "Anything under 5% would be interpreted by markets as really positive for risk on."
Lee expects the S&P 500 to rise as much as 9% by year-end, potentially reaching 8,200 to 8,400, citing accelerating earnings growth. He pointed to third-quarter earnings potentially approaching 30% growth and 2027 estimates up more than 20% from the start of the year.
Sources: CNBC, Crypto Briefing
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