The S & P 500 could surrender nearly all its gains this year if a Democratic sweep triggers a disputed midterm election and military escalation in Iran, according to Evercore ISI. The firm's midterm election analysis, published Sunday, examined different possible outcomes and likely market reactions.

In the worst-case scenario, the S & P 500 falls more than 10% to 6,800 by year-end if President Donald Trump escalates military action in Iran before the new Congress is seated in January, or what Evercore ISI called "kinetic escalation." That would wipe out the almost 11% gain posted by the S & P 500 so far this year. "This would be a 'dip not to be bought,'" wrote analysts led by Julian Emanuel, chief equity and quantitative strategist, in an 11-page report out Sunday.

Emanuel warned that an oil price spike, widening credit spreads and an economic slowdown could fuel a prolonged sell-off and create a challenging start to 2027. To be sure, this particular scenario is not Emanuel's base case assumption, but it is one he fears, even as his broader recommendation is to buy any election-related weakness.

Opposite pole At the other end of the spectrum, Evercore's most bullish scenario assumes Republicans keep both chambers of Congress, the vote is undisputed and Iran moves to negotiate with the U.S., driving a sharp decline in oil prices. That unlikely scenario would put the S & P 500 at 8,400 by year-end, or 11.4% above Monday's close.

Evercore's middle scenario assumes a divided Congress, an undisputed election and no military escalation in Iran, putting the year-end S & P 500 target at 7,750, a little less than 3% above Monday's close. That outcome would constitute a "near-term status quo" that eventually moves toward a bipartisan geopolitical solution on Iran.

The election comes against a backdrop of mounting macro pressures, according to Evercore, including West Texas Intermediate crude oil at about $100 a barrel, a narrowing gap between 2- and 10-year Treasury yields and an expectation the Federal Reserve will raise interest rates on Dec. 9. Meanwhile, the largest cloud-computing companies face growing financing needs to support the artificial intelligence buildout. Hyperscalers will have to raise capital to finance $1.3 trillion in 2027 capital expenditures, according to Evercore, putting more strain on capital markets four years into a bull market that started in late 2022.

Hot button issue The AI-fueled data center buildout has been a hot button issue for voters in this year's midterm elections. Democrats lead the opposition: 80% oppose AI data centers near their homes while just 4% support them, according to a new CNBC All-America Economic Survey . Across all voters, 63% don't want a nearby AI data center and only 13% support one.

"Against this backdrop, stocks are likely to come under pressure if doubt is cast on the outcomes," Evercore wrote. But a Democratic victory alone won't necessarily stop the rally. In Evercore's scenario where Democrats win both chambers and the election is disputed, but military action doesn't escalate, the investment bank sees the S & P 500 ending the year at 7,650, a little more than 1% above Monday's close. Any initial decline "is a buying opportunity," the analysts said. No military escalation would signal Trump is open to all alternatives, including bipartisan cooperation despite election lawsuits, according to Evercore.

Evercore left unchanged its base line, year-end S & P 500 target of 7,750.

The firm believes continued economic strength should boost corporate earnings and drive stocks, and views any "Midterms driven downside volatility as a buying opportunity to add to core AI-Centric exposure in anticipation of new All-Time Highs in late 2026 or early 2027." The biggest threat to the economy is an oil shock that threatens economic stability, earnings and stock prices, Evercore said. "The exception to 'buy the dip' is our view that, should 'kinetic escalation' with Iran drive [West Texas Intermediate crude oil] above $120/bbl for a prolonged period (a month or more) or should the oil price spike to the all-time high of $147/bbl, that an economic slowdown, credit widening and a longer and deeper market turndown would result."

Barring the unforeseen, Evercore's preferred portfolio remains focused on AI, with recommendations to remain overweight in information technology, communication services and consumer discretionary stocks.