Wall Street Warns: "If Democrats Take Both Chambers, an Unprecedented Market Crash Is Coming... Absolutely No Buying the Dip"

Worst-Case Scenario for the U.S. Midterms
Stocks Plunge 10% if Democrats Take Congress and Iran Conflict Erupts
Nearly All of This Year's 11% Gains Wiped Out... "Don't Buy the Dip"
S&P 500 Could Hit 8,400 if Republicans Hold; Sector Winners and Losers

Wall Street has warned that the New York stock market could give back most of its gains this year, depending on the outcome of the U.S. midterm elections. If Democrats take control of both chambers of Congress, disputes over the election results erupt, and military conflict between the United States and Iran adds to the turmoil, the S&P 500 could fall to around 6,800 by year-end. That would leave the index, which has risen about 11% so far this year, having effectively given back nearly all of its gains.

U.S. President Donald Trump speaks at a campaign rally at the Ocean Center in Daytona Beach, Florida, on the 30th of last month (local time). AP-Yonhap News

Democratic Control of Congress and Iran Conflict Raise Alarm: S&P 500 Could Fall to Around 6,800

Evercore ISI, the equity research division of investment bank Evercore, has released a report analyzing market scenarios and their potential impact based on the U.S. midterm election results, CNBC reported on November 3 (local time).

The most pessimistic scenario assumes that Democrats win control of both the Senate and the House of Representatives and that disputes over the election results break out. It also assumes that U.S. President Donald Trump escalates military action against Iran before the new Congress takes office in January 2027.

Evercore ISI estimates that if these combined risks materialize, the S&P 500 could fall more than 10% by year-end, to around 6,800. In that case, it would effectively give back nearly all of its gains of about 11% so far this year.

Investors in exchange-traded funds (ETFs) that track major U.S. stock indexes would also be hard hit. This means that investors in leading products such as the SPDR S&P 500 ETF Trust (SPY) and Vanguard S&P 500 ETF (VOO) could give back a substantial portion of their gains for the year in the final few weeks.

"Avoid Buying the Dip"...Longer-Term Decline Also a Possibility

The analysis team led by Julian Emanuel, Evercore ISI's chief equity and quantitative strategist, warned that this would be "a bear market in which investors should not buy the dip."

The selling pressure could also last beyond the short term. If oil prices surge, credit spreads widen, and the economy slows at the same time, the sell-off could persist and weigh on the market into early 2027.

However, Emanuel stressed that the worst-case scenario was not the most likely outcome. He said it was intended to outline the risks he was particularly concerned about among several potential risk factors. Evercore ISI also maintained its existing view that investors should use any post-election decline as a buying opportunity, unless such an extreme scenario materializes.

Republican Hold on Both Chambers Could Lift Index to Around 8,400; Base-Case Forecast Is Around 7,750

Evercore ISI's market forecasts vary widely depending on the election outcome. In contrast to the worst-case scenario, the S&P 500 could rise to around 8,400 by year-end if Republicans retain their majorities in both the Senate and the House of Representatives and no disputes challenging the election results occur.

The optimistic scenario also assumes that oil prices plunge as Iran enters negotiations with the United States. Under this scenario, the year-end target is around 8,400, 11.4% above the closing level on November 2.

In its base-case scenario, which it considers the most likely, Evercore ISI assumes that the Senate and House are controlled by different parties, President Trump accepts the election results, and the United States and Iran avoid military conflict. In this case, Evercore ISI forecasts a year-end S&P 500 target of around 7,750.

Evercore ISI expects this outcome to create a short-term status quo as the two parties seek a bipartisan geopolitical solution to the issue of Iran.

JPMorgan and Citi Also Focus on Election Risks, Warn of Near-Term Volatility

Other Wall Street investment firms are also watching for short-term market reactions to the election results. JPMorgan expects the S&P 500 to fall about 0.5% the day after the election if Democrats take control of both chambers of Congress. By contrast, it sees the index potentially rising by as much as 1% if Republicans retain the Senate.

A trader at the New York Stock Exchange (NYSE). AFP-Yonhap News

Citigroup also said the year-end market could benefit if Republicans retain the Senate, even if they lose their majority in the House. The market's direction immediately after the election could depend on how control of Congress is decided.

AI and Defense Stocks Could Face Pressure as Post-Midterm Rally Pattern Comes into Question

If Democrats take control of Congress, the impact could vary across sectors as well as across the broader market. Artificial intelligence (AI) stocks, in particular, could face pressure from regulations on data center construction and the possibility of reduced tax incentives, analysts say.

Goldman Sachs said that tax support for data centers could be restricted if Democrats take control of Congress. However, it considers a nationwide halt to data center construction unlikely.

The defense sector could also come under pressure from the possibility of limits on defense spending. By contrast, expectations for expanded health insurance support could benefit the healthcare sector. In other words, policy changes resulting from the election could affect investment sentiment differently across sectors.

Historically, U.S. stocks have tended to rise after midterm elections. According to CNBC, the S&P 500 rose in the year following every midterm election held since the early 1980s. However, with the index already up by double digits ahead of this year's election, some are concerned that the historical pattern may not repeat.

Jonathan Krinsky, chief market technician at BTIG, said that in years with midterm elections, the S&P 500 has historically gone through a period in the second half of the year when it fell by an average of about 14%. His warning is that investors should pay attention to the possibility of a post-election decline, given that stocks have already performed strongly ahead of the election this year.

This content was produced with the assistance of AI translation services.