Clean sweep or divided Congress, these are the midterm-elections trades to make, says JPMorgan

By Jamie Chisholm

Some stocks will face very different environments depending on how Americans vote in November

The battle in Texas between Democratic nominee James Talarico, left, and Republican candidate Ken Paxton could swing the U.S. Senate.

War in the Persian Gulf, surging bond yields and energy costs, a possible Federal Reserve interest-rate hike this month, and growing skepticism about the artificial-intelligence boom - despite all that, the S&P 500 sits just 1.7% from its record closing high.

However, stocks' stoicism faces another test: the U.S. midterm elections. In our call of the day, a team of analysts at JPMorgan's global market intelligence unit, led by Andrew Tyler, looks at the possible outcomes and presents a trading template for investors to follow.

The JPMorgan team says that, on average over the last 23 midterm cycles, the sitting president's party has lost around 27 House seats and about three Senate seats. If that trend holds, Democrats will take the House, and the Republicans will hold the Senate.

"This aligns with betting markets which see a 53% chance that the GOP holds the Senate and an 85% chance that Dems take the House," says JPMorgan.

JPMorgan's Delta One Trading Desk took three likely scenarios and suggested the trades to make.

There's a 47% probability of a Democratic Congress, according to Kalshi. That would mean a high likelihood that Affordable Care Act enhanced tax credits are extended, and this would support managed-care organizations and hospitals. JPMorgan doesn't specify the basket constituents, but it may include such stocks as Centene (CNC), Molina Healthcare (MOH) and Tenet Healthcare (THC).

There would also be better odds of "affordability support and targeted fiscal programs, supporting lower-income discretionary demand," the analysts say. Such stocks as Dollar General (DG), Walmart (WMT) and Ross Stores (ROST) could be among those benefiting.

However, a Congress unified under Democratic leadership would probably be negative for the next-generation defense sector, such as drones, space and missile defense. That basket may include AeroVironment (AVAV), Kratos Defense (KTOS) and Mercury Systems (MRCY).

Financial groups that make a chunk of earnings from buoyant capital markets may face waning tailwinds "as oversight and investigations rise, weighing on deal/issuance momentum." Exposed stocks may include Goldman Sachs (GS), Morgan Stanley (MS) and Evercore (EVR).

The energy sector might also struggle as increased regulation under the Democrats tempers near-term support for project approvals. That would suggest short positions in the likes of Williams Cos. (WMB), Kinder Morgan (KMI) and EQT Corp. (EQT).

A reduced chance of the Clarity Act being passed could hit the cryptocurrency sector, too, with shares such as Coinbase Global (COIN), Robinhood Markets (HOOD) and Strategy (MSTR) facing new headwinds.

Next is the current 39% probability of a Democratic House and Republican Senate. This also may help stocks linked to the ACA tax-credit extension as the proposals could be folded into negotiations over the budget and continuing resolutions. However, under a split Congress, JPMorgan thinks that defense will remain a bipartisan priority and that "even with gridlock, baseline defense budgets support traditional primes." A basket of long positions may include Lockheed Martin (LMT), General Dynamics (GD) and RTX (RTX).

Still, the split Congress would again not be positive for the capital-markets-exposed financial groups, for the reasons noted above.

The least likely outcome among the three explored, priced at 16%, is a Republican majority House and Senate. JPMorgan deems this scenario negative for two of the long plays in the Democratic clean sweep: the ACA beneficiaries and lower-income discretionary goods and services companies, as "affordability pressures persist."

But with the GOP in control, as has been the case since the presidential-election year 2024, it would pay to be long the next-generation defense basket as there's a greater chance of higher defense spending, notably on the "Golden Dome" project.

Those financials exposed to capital markets will do well as regulation remains light, while easier permitting should boost energy-infrastructure build-out. "Support for reshoring and supply-chain security is supportive for critical inputs (rare earths), domestic manufacturing, and critical tech," says JPMorgan. Here, a basket to buy may include MP Materials (MP), Albemarle (ALB) and Caterpillar (CAT). It's also more likely the Clarity Act is passed, boosting the crypto sector.

One topic that is not mentioned specifically by JPMorgan in its trading scenarios is the AI build-out. Perhaps that's because the issue currently is so toxic that it's perceived as being in bipartisan disfavor, and there may be little difference in its treatment regardless of the midterms' outcome.

The markets

U.S. stock-indices SPX DJIA COMP are higher at the opening bell on Wall Street as Treasury yields BX:TMUBMUSD10Y fall. The dollar index DXY is lower as the yen jumps. Oil futures (CL.1) are up and gold futures (GC00) are trading around $4,527 an ounce.

 
Key asset performance                                                Last       5d      1m      YTD     1y 
S&P 500                                                              7666.6     -0.12%  -0.74%  11.99%  18.89% 
Nasdaq Composite                                                     26,217.83  0.34%   -0.55%  12.80%  21.96% 
10-year Treasury                                                     4.78       10.60   9.90    60.80   61.80 
Gold                                                                 4483.5     -3.68%  4.30%   3.49%   24.46% 
Oil                                                                  91.18      9.15%   16.55%  58.82%  43.95% 
Data: MarketWatch. Treasury yields change expressed in basis points 

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The buzz

Fed governor Christopher Waller said Thursday that he is willing to hold interest rates if upcoming data confirms inflation pressures are easing. His comments boosted bond markets, pushing down yields.

Nvidia (NVDA) confirmed it was buying Hugging Face, an open-source AI model and dataset platform, for $11.9 billion.

Broadcom's stock (AVGO) is lower despite the chip maker's earnings beating Wall Street forecasts.

Snowflake shares (SNOW) are surging after the software company's results surpassed expectations and it delivered upbeat revenue guidance.

Campbell's stock (CPB) is down after the soup-maker said it would cut its dividend to help pay down debt.

The Dutch central bank has moved billions of dollars' worth of gold out of North America and relocated it to London, citing "increasing geopolitical unrest."

DocuSign (DOCU), Zscaler (ZS) and Lululemon athletica (LULU) will present earnings after Thursday's closing bell.

U.S. weekly jobless claims were 206,000, a touch higher than expectations of 205,000.

The Institute of Supply Management's services purchasing managers' index for August will be published at 10 a.m.

Paid actors, AI writing: How a new kind of video business cashed in on America's divided politics.

The chart

The dividend yield on the State Street SPDR S&P 500 ETF Trust, widely known by the ticker symbol "SPY" SPY and a popular way for investors to hold the S&P 500, has dropped to just 1%. Bespoke Investment notes that "the only other time prior to this summer that SPY's dividend yield was below 1% was at various points from mid-1999 to mid-2001."

Top tickers

Here were the most active stock-market ticker symbols on MarketWatch as of 6 a.m. Eastern time.

 
Ticker symbol  Security name 
NVDA           Nvidia 
TSLA           Tesla 
AVGO           Broadcom 
SPCX           SpaceX 
MU             Micron Technology 
TSM            Taiwan Semiconductor Manufacturing 
GME            GameStop 
GPRO           GoPro 
AAPL           Apple 
AMD            Advanced Micro Devices 

-Jamie Chisholm

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(END) Dow Jones Newswires

09-03-26 0935ET