Why JPMorgan says election gridlock will be the best-case scenario for stocks

• JPMorgan says the best-case scenario for stocks is a divided Congress, regardless of winner.

• Such a result would make it harder for either candidate to implement proposals.

• "Under either gridlock scenario, we think equities reprice higher," the firm wrote.

Regardless of the next president, JPMorgan expects stocks to rise if the US election delivers a divided Congress.

"Under either gridlock scenario, we think equities reprice higher as we clear the uncertainty, volatility decreases and hedges unwind, with investors refocusing on the Fed at a time when the economy and corporate earnings remain resilient," analysts led by Dubravko Lakos-Bujas said in note published Sunday.

As of Tuesday morning, polling shows a neck-to-neck race between Kamala Harris and Donald Trump. Without a clear outcome, Wall Street could be headed toward two sharply different investing environments, given each candidate's contrasting policy ideas.

However, Congressional gridlock would make it harder for either presidential candidate to implement their proposals as easily as they could under a Democratic or Republican-held Congress.

"I think the stock market has to be concerned if we get a sweep by the Democrats or a sweep by the Republicans," market veteran Ed Yardeni told Bloomberg TV last month. He added: "So I think the stock market will do best if we basically vote for gridlock, that whoever's in the White House just doesn't have an open season to do whatever they want."

To JPMorgan's point, investors have been preparing for the possibility of a red or blue sweep. For instance, tariff-sensitive consumer equities have been underperforming in anticipation of a potential Trump win. The Republican candidate has pledged to implement sweeping taxes on all US imports.

Under a Trump presidency and a divided Congress, JPMorgan expects domestic and energy equities to be more sensitive. CHIPS Act beneficiaries and multinational companies are more sensitive under a Harris presidency and divided Congress.

If a deadlocked Congress helps ease uncertainty over extreme policy changes, investors can once again focus on trading over macroeconomic factors.

As JPMorgan noted, all eyes will turn to the Federal Reserve this week. The central bank is expected to implement a 25-basis-point interest rate cut this week.

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