Some stocks face a vey different environment depending on how America votes

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 loom. In our Call of the Day, a team of analysts at JPMorgan's global market intelligence unit, led by Andrew Tyler, look at the possible outcomes and present a trading template for investors to follow.

The JPMorgan team says that on average the sitting president's party has lost around 27 House seats and about 3 Senate seats over the last 23 midterm cycles. 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 the 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 premium 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 "greater odds of affordability support and targeted fiscal programs, supporting lower-income discretionary demand," they say. Such stocks to benefit could include Dollar General (DG), Walmart (WMT), and Ross Stores $(ROST)$.

However, a Democratic Congress 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 fading deregulation tailwinds "as oversight and investigations rise, weighing on deal/issuance momentum." Such stocks may include Goldman Sachs (GS), Morgan Stanley (MS) and Evercore (EVR).

The energy sector may also struggle as increased regulation tempers near-term support for project approvals. That would mean being short the likes of Williams Cos. $(WMB)$, Kinder Morgan $(KMI)$, and EQT Corp. (EQT). A reduced chance of the Clarity Act being passed may hit the cryptocurrency sector, too, with shares such as Coinbase Global (COIN), Robinhood Markets (HOOD) and Strategy (MSTR) struggling.

Next is a 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 budget and continuing resolution negotiations. However, under a split Congress, JPMorgan thinks defense will remain a bipartisan priority and that "even with gridlock, baseline defense budgets support traditional primes." A long basket of such stocks 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, currently 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 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 buildout. "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 issue 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 bipartisan, and there may be little difference in its treatment regardless of the election outcome.