Wall Street usually loves divided government. Gridlock means fewer surprises, fewer new taxes, fewer regulatory curveballs. But veteran market strategist Ed Yardeni says the market may be about to learn that there is such a thing as too much gridlock.

Yardeni, president of Yardeni Research, told Bloomberg that a Democratic sweep in Tuesday's midterm elections could deliver a "very cold shower" for stocks, even with Republicans retaining the White House. His concern is not that Democrats will suddenly pass a wave of market-unfriendly legislation. It is that Washington could become so divided that lawmakers struggle to agree even when action is urgently needed.

Traders on Polymarket put the probability of Democrats capturing both the House and Senate at approximately 73%, with more than $52 million traded across the election market. Yardeni believes stock investors may not have fully priced in that possibility, noting that some remain skeptical of polls showing strong Democratic support.

Why Gridlock Could Hurt Stocks This Time

"Usually the market loves gridlock, but in this situation we're talking about much more partisanship," Yardeni said.

Investors traditionally welcome divided government because it makes major policy changes harder to pass, reducing the risk of sudden changes to taxes and regulations. That is the standard playbook. Yardeni is arguing that this time the playbook may not apply.

He warned that future government shutdowns and disputes over the national debt could last considerably longer, potentially causing greater economic damage. In other words, the thing markets usually like about gridlock, the inability to do anything, becomes a liability when the thing that needs doing is keeping the government open and paying its bills.

For Yardeni, the bigger concern is what happens if bond investors lose confidence in Washington's ability to manage its finances. Yardeni coined the term "bond vigilantes" in 1983 to describe investors who push back against excessive government borrowing by selling bonds. If those investors demand higher yields, borrowing costs for businesses could rise, putting pressure on stocks. Congress might then need to agree on deficit reduction precisely when political divisions make compromise most difficult.

Yardeni Still Sees Buying Opportunities

Despite his warning, Yardeni isn't predicting the end of the bull market. In an October 29 Financial Times column, he argued that stock-market declines following the midterms could offer buying opportunities, supported by resilient economic growth and corporate earnings.

His view contrasts with that of Morgan Stanley strategist Mike Wilson, who sees the election as a potential clearing event for stocks, with the removal of political uncertainty potentially supporting a rally. Same election, two very different readings of what it means for your portfolio.

For investors in the State Street SPDR S&P 500 ETF Trust (SPY), Yardeni's warning is that even an election result widely anticipated by traders could introduce fresh risks if political gridlock fuels another fiscal confrontation.