UBS details all the possible outcomes of the midterm elections and why a so-called blue tsunami could be the most devastating for stocks

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House minority leader Nancy Pelosi.

• The midterm elections are less than two months away.
• In a detailed note to clients, UBS laid out the market implications of four outcomes for both chambers of Congress: Republicans maintaining their majority, Republicans expanding their advantage, Democrats gaining more seats, and Democrats flipping both houses.

The midterm elections will be here before we know it.

On November 6, Americans will vote for the next slate of senators and representatives who will fill a total of 470 seats being contested in Congress.

Republicans, and President Donald Trump, are hoping for a "red wave" that would help them maintain their majority in both chambers. The strong economy - in its second-longest expansion in history - helps them make a case for continuity to voters.

However, history is not on their side, as a president's party rarely holds on to congressional majorities in midterm elections. Democrats are hoping that a progressive and anti-Trump agenda would flip 24 seats in the House and 28 seats in the Senate - a so-called blue tsunami.

"Markets and the economy have - for the most part - thrived over the past two years under a unified Republican government," Mike Ryan, the chief investment officer at UBS, said in a note on Tuesday. His team at UBS is well aware that a single party's hold on political power don't alone determine what happens in financial markets.

But ballot outcomes do matter, even if only in the short term.

UBS's regression model turned out to be favorable for Republicans and had them losing 9-13 seats in the House.

"Since few can claim the ability to reliably predict elections - look no further than the Brexit vote and the 2016 US presidential election - humility is called for as we look forward to November," Ryan said.

On that note, UBS examined every major outcome and what each might mean for investors.

1. A red wave

In this scenario, Republicans increase their majorities in the House and Senate, and are able to pass legislation that fell through during the first half of the Trump administration. Items on their agenda would include faster deregulation, a second iteration of tax reform, more infrastructure spending, and funding for the US/Mexico border wall.

This outcome would make impeachment, a Supreme Court freeze, or drug-price controls unlikely, in UBS' view.

It would be positive for risk assets, which have already received a partial boost from tax reform. It would also support the US dollar and limit increases in long-term bond yields, Ryan said.

There's a 2% probability that this scenario is realized, according to UBS.

2. The status quo

In this outcome, the red-to-blue ratio remains largely unchanged as Republicans keep control of the House and Senate.

They'd still be able to carry out the Trump agenda, although not as extensively as they would have if they achieved a red wave. They'd likely ease some more regulations on corporate America and provide funding for the border wall. They could also go ahead with repealing the Affordable Care Act, which three Republicans including the late Sen. John McCain prevented last summer.

Stocks could stage a relief rally, perhaps similar to the bounce that ensued after election day in 2016. According to Ryan, investors would be hopeful about less gridlock and dysfunction in Congress.

The GOP-led Congress could also proceed with more fiscal spending financed by the deficit, which would further benefit risk assets but may increase bond yields and weaken the dollar.

UBS assigned an 18% probability to this outcome.

3. The historical norm

At 60%, this has the highest probability of happening, according to UBS.

It would see Republicans losing some seats and thinning their majority, leaving the president's power of executive orders as a primary vehicle to enact his agenda. It would also be a launching pad for Democrats to investigate the Trump administration, and would create gridlock for legislative actions.

Government shutdowns would be more likely if this outcome prevails, although markets typically shrug these off as non-events.

Because both parties don't find much common ground on spending, the budget deficit would remain high and long-term bond yields would rise, Ryan said. But drug-price controls, which Trump has promised, could be one area of compromise, and that would be negative for big pharma stocks.

4. A blue tsunami

It's more likely than a red tide and could be more detrimental to risk assets.

Should Democrats prevail, we can expect "extreme gridlock," slower regulatory relief, and a freeze on Supreme Court confirmations, Ryan said. Last-minute deals on the debt ceiling could keep markets on edge, he added.

It's also possible that lawmakers kick off impeachment proceedings, although a removal of Trump would be unlikely.

"If Democrats move to impeach President Trump in the House without Republican support, there could be a short-term selloff in risk assets," Ryan said. "However, given the high probability of acquittal in the Senate, there will likely be little to no lasting market impact."

This outcome - a "blue wave" according to Ryan - has a 20% probability in UBS's view.