A Democratic sweep that ends in a disputed midterm election, combined with deeper U.S. military involvement in Iran, could erase nearly all of the S&P 500's gains for 2026, according to Evercore ISI research cited by CNBC.
Evercore released its midterm election analysis Sunday, mapping out several possible election outcomes and the likely market response to each one. Think of it as a choose-your-own-adventure book for investors, except the endings range from mildly unpleasant to genuinely alarming.
How the Worst Case Unfolds
The bleakest projection starts with a Democratic sweep and a contested result. From there, Evercore sees the S&P 500 sliding more than 10% to 6,800 by year-end if President Donald Trump expands military action in Iran before the new Congress takes office in January. The firm described such a move as "kinetic escalation," CNBC reported.
Timing matters here. The stretch between Election Day and the January swearing-in leaves roughly two months in which political uncertainty at home could collide with conflict abroad. That's not a lot of time for markets to catch their breath.
A drop to 6,800 would cancel out almost all of the index's roughly 11% advance so far this year. Holders of broad index funds such as the State Street SPDR S&P 500 ETF Trust (SPY) and the Vanguard S&P 500 ETF (VOO) would see most of a strong year evaporate in its final weeks.
Oil, Credit and Growth Risks
"This would be a 'dip not to be bought,'" analysts led by Julian Emanuel, Evercore's chief equity and quantitative strategist, wrote in the report, according to CNBC.
Emanuel pointed to several forces capable of turning an initial decline into a drawn-out sell-off. Among them: a surge in oil prices, widening credit spreads and a slowing economy. Each would land differently across the market.
Higher crude prices typically benefit energy producers such as ExxonMobil Holdings Corp. (XOM) and Chevron Corp. (CVX).
Airlines, including Delta Air Lines Inc. (DAL) and United Airlines Holdings Inc. (UAL), tend to feel the pain through rising fuel costs.
Wider credit spreads would pressure high-yield debt, a corner of the market tracked by the iShares iBoxx $ High Yield Corporate Bond ETF (HYG).
Taken together, the pressures Emanuel outlined could weigh on stocks for months and set up a difficult start to 2027, he cautioned.
Not the Base Case
Emanuel does not view the scenario as his most likely outcome, but he does count it among the risks he fears most. That's a useful distinction. Plenty of Wall Street forecasts come with a worst-case number attached, but few come with a clear playbook for what to do if the worst actually happens.
His broader advice to investors remains intact. Evercore ISI still recommends buying any weakness tied to the election, as long as the worst-case scenario does not play out. Investors following the firm's lead would treat election-driven pullbacks in benchmarks such as the Invesco QQQ Trust (QQQ) as potential entry points.
In other words, the plan is to buy the dip, unless the dip turns into something much worse. Which is easy to say and considerably harder to execute when the headlines are screaming.
The Bottom Line
A disputed count alone carries its own set of risks. Escalation in Iran before the new Congress is seated would add another, and Evercore sees that combination potentially pushing stocks sharply lower. For now, the firm is sticking with its base case, but it wants investors to know exactly what the nightmare scenario looks like.
