• With key battleground states still reporting vote counts, Wall Street is updating its outlook for the election's outcome and resulting market implications.
  • The so-called Blue Wave expected by many is all but dashed as Republicans are poised to maintain control of the Senate and fortify their minority in the House.
  • Even if former Vice President Joe Biden wins, the likelihood of a divided government cuts into investors' hopes for massive front-loaded stimulus.
  • Here's what five Wall Street experts had to say about the election, chances for fiscal support, and trades for a potential contested result. 
  • Visit Business Insider's homepage for more stories.

The so-called Blue Wave anticipated by many Wall Street banks failed to emerge last night, and top economists are quickly dulling expectations for near-term stimulus and a spate of progressive policies.

The US presidential race remains too close to call as mail-in ballots continue to be counted in key states including Pennsylvania, Michigan, Wisconsin, and Georgia. Yet congressional outcomes point to resounding wins by many GOP candidates, giving Republicans likely control Senate and a boost to their House minority.

Such a divided government would stifle any Biden administration plans to pass large fiscal stimulus, corporate tax hikes, or other sweeping legislation. Major banks quickly reacted to the shift in expectations, advising clients on how to adjust portfolios for near-term uncertainty and the likelihood of a split Congress.

Here's what five Wall Street experts had to say about the election, its market implications, and the future of the US economic recovery.

Read more: Famed economist David Rosenberg told us 4 crucial trends won't change no matter how the elections go. Here's how to invest in them all.

BlackRock: 'Look through any volatility'

A conclusive presidential-election result "could take a few days or more" to materialize, and could very well ratchet up market volatility, analysts at the BlackRock Investment Institute said Wednesday.

"We prefer to look through any volatility and stay with high-conviction positions amid any sell-offs in risk assets," they wrote. "Likely low trading volumes in this period could magnify market moves."

Among the biggest implications from the election results is the dampened chance of a front-loaded stimulus package. Investors rested hopes for a major relief bill in a Democratic sweep after months of bipartisan negotiations failed to procure a compromise.

A Biden victory and split Congress "would constrain Democrats' ability to ... launch large-scale fiscal stimulus," BlackRock said. A second Trump term could yield a larger deal, but the firm expects "little public investment in either case."

Mizuho: 'Gridlock no matter who wins'

After months of speculation, the lack of a party sweep ensures "gridlock no matter who wins," Steven Ricchiuto, chief US economist at Mizuho Securities, said.

"This means the most controversial policy initiatives of either party are off the table for at least the next two years," he added.

For Democrats, that likely means fiscal stimulus, corporate tax hikes, and healthcare reform. Republicans would likely face an uphill battle for cutting taxes and industry regulation.

Still, the presidential election remains too close to call, and the likelihood of a divided government means investors should focus instead on macro fundamentals, Ricchiuto said. Economic growth, corporate earnings, inflation expectations, and Federal Reserve policy will further drive markets, he added.

Mizuho reiterated its view that the S&P 500 will reach between 3,800 and 4,000 by the end of 2021 regardless of the elections' outcomes.

UBS: 'Central bank support will continue to support risk assets'

While Wednesday's headlines will invariably focus on the presidential election and lack of an immediate outcome, the market cares far more about the path of the coronavirus, Mark Haefele, chief investment officer at UBS and the world's largest wealth manager, said.

Fiscal stimulus hopes may be dashed due to Democrats' poor performance in key congressional races, but another critical support remains in play.

"The way the Nasdaq is trading up and the Russell is trading down and the way Treasurys are moving, it looks like there's still a lot of faith that central bank support will continue to support risk assets," Haefele told Bloomberg TV.

Investors will get their next update on Federal Reserve policy after policymakers' Thursday meeting. The central bank is expected to hold interest rates close to zero and maintain its pace of asset purchases.

If central-bank support and a fiscal-stimulus gridlock sounds familiar, you'd be right, Haefele said. Elections rarely matter so much on their own, and the path of global economic recovery from the virus crisis will matter more to how markets move in the coming months, he added.

"When you look out to the middle of the year we're looking at a world that is more digital, more indebted, more local, and the world overall is one that's moving towards sustainable assets - in that picture things have not changed that much," Haefele said.

Read more: Iconiq Capital, which counts some of the world's most influential families as clients, broke down the investment implications of the US election. Here are the highlights of its 23-page presentation.

Edison Group: 'Probability of a contested result cannot be excluded'

Former Vice President Joe Biden is steadily closing the gap with the president in crucial states as more mail-in ballots are counted. Still, investors shouldn't yet discount the possibility of protracted legal battles over election results, Alastair George, chief investment strategist at Edison Group, said.

"Unfortunately, the probability of a contested result cannot be excluded given the multiplicity of ways that a close result could be challenged in the US courts," he added.

Both presidential candidates are confident in their ability to win. President Donald Trump prematurely and falsely declared victory early Wednesday morning and called to stop counting legitimate votes in battleground states. Biden has been more reserved in his remarks but indicated Wednesday that he sees victory on the horizon.

Both campaigns boast strong legal teams ready to contest close results. But a court challenge could quickly give way to "months of delay and more importantly the risk of policy paralysis at a critical time for the US economy," George said. Investors should be prepared for such an unprecedented turn of events, he added.

JPMorgan: 'Leaning towards a familiar outcome'

Even though a final result may not emerge for days, "the most unusual US election in modern history is leaning towards a familiar outcome — a divided government," John Normand, head of cross-asset fundamental strategy at JPMorgan, said. Congress is likely to remain split, an outcome that practically guarantees Democrats can't embark on the fiscal spending spree they likely hoped to.

Investors still expecting large-scale fiscal easing should park cash in short-dated bonds, cyclical stocks, and infrastructure trades in commodities, Normand said. Even if a major deal is dashed, a smaller stimulus package is still on the table.

A near-term vaccine breakthrough could also provide a boost to economic growth, Normand added.

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The 'Blue Wave' in the US election didn't happen. Here's how a UBS investment chief believes investors can trade short-term market volatility and protect their portfolios in the long term

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