By Caitlin Ostroff

U.S. stocks edged higher Tuesday as investors await the outcome of two electoral races in Georgia that will determine control of the Senate.

The S&P 500 rose 0.5%, and the Dow Jones Industrial Average was up 0.5% as well. The Nasdaq Composite jumped 0.6%. The major benchmarks tumbled sharply Monday, after closing at record levels just days earlier.

Money managers are closely monitoring the Georgia Senate runoff elections Tuesday. If Democrats win both seats, that could make it easier for President-elect Joe Biden's administration to pass new legislation.

Additional fiscal stimulus would be more likely if Democrats control Congress and the White House, and that could potentially give stocks another leg up, investors have said. But the prospect of tax increases and more regulation is also weighing on markets, they cautioned.

"The market loves status quo, gridlock, and that is almost where we are at the moment," said Patrick Spencer, managing director of U.S. investment firm Baird. "There is fear of regulations on big tech and there's fear of more taxes, but with a slim majority, you're not going to get a lot of that."

Mr. Spencer isn't alone in that view. A narrow victory for Democrats, or Republicans retaining control of the Senate, is likely to mean that the legislative agenda would be tempered, others also said.

"If the government is in gridlock, that is Goldilocks, because the government will have their hands tied," said Gregory Perdon, co-chief investment officer at private bank Arbuthnot Latham.

In the near term, investors also remain focused on the coronavirus pandemic, with elevated infection levels and the likelihood of restrictions on social and business activity potentially setting back the global economic recovery. A highly contagious strain of Covid-19 recently discovered in the U.K. has also been found in New York, the state's governor said Monday.

"There's generally quite a consensus view on the outlook, which is: OK, we've had the third wave, fourth wave, but thanks to the vaccine, we know it's going to be limited in time," said Daniel Morris, chief market strategist at BNP Paribas Asset Management. "We've seen a hit to that with the new strain of the virus."

Although that is likely to weigh on sentiment, liquidity from central banks, increased fiscal spending and the vaccine rollout provide a counterbalance to the concerns over growth, Mr. Perdon said.

"The market will stay bullish, regardless of which side wins" in Georgia, Mr. Perdon said. "The underlying theme is really the fear of missing out."

In bond markets, the yield on the 10-year Treasury note ticked higher to 0.940%, from 0.915% Monday. Yields rise when prices fall.

Fresh figures on the strength of manufacturing activity in December are due from the Institute for Supply Management at 10 a.m. ET. Economists surveyed by The Wall Street Journal expect that factories continued to expand output in December, albeit at a slower pace than in November.

Overseas, the Stoxx Europe 600 ticked down 0.4%.

Hong Kong's Hang Seng rose 0.6%. The Hong Kong-listed shares of China's three largest telecommunications companies surged after the New York Stock Exchange reversed its decision to delist them. The previous plan followed a U.S. government order, signed by President Trump in November, that prohibits Americans from investing in a list of companies the U.S. government says supply and support China's military, intelligence and security services.

Shares of China Mobile, which is among the most valuable of China's listed state-owned enterprises, rose 5.1%, while China Telecom and China Unicom jumped 3.4% and 8.5%, respectively. China's Shanghai Composite added 0.7%.

Japan's Nikkei 225 edged down 0.4%.

Amber Burton contributed to this article.

Write to Caitlin Ostroff at caitlin.ostroff@wsj.com

(END) Dow Jones Newswires

01-05-21 1020ET