NEW YORK (Reuters) -Wall Street is on edge heading into the New York City mayoral election on Tuesday, with a potential victory for Zohran Mamdani set to reverberate through the heart of global capitalism, where financiers worry about the city's lasting competitiveness and appeal.

Investors also are watching the results of governors' races in New Jersey and Virginia to gauge whether Democrats are gaining momentum against President Donald Trump's Republican Party ahead of next year's U.S. midterm elections.

Mamdani, a 34-year-old state lawmaker who won the Democratic nomination, has been leading in polls and betting markets in a fierce contest to run New York, the U.S. financial capital.

Wall Street and the finance industry have expressed broad misgivings about the prospect of a Mamdani mayoralty, as the democratic socialist pushes for higher taxes on corporations and the wealthy. However, they are also hopeful that he moderates his positions or finds roadblocks to achieving some of his aims.

A Mamdani win is "a risk I'm watching in 2026," said Dean Lyulkin, CEO of Cardiff, a private investment firm and small business lender in San Diego, California.

"Actual policy often turns out much more benign than campaign rhetoric, but if other major cities follow this pattern, markets may start pricing in more tax and regulatory risks," Lyulkin said.

Mamdani's main opponent is Andrew Cuomo, the former Democratic governor of New York state running as an independent, with Republican nominee Curtis Sliwa third in most opinion polls.

Mamdani has focused his campaign on affordability. His agenda includes a rent freeze, free bus service, universal childcare and city-run grocery stores. Mamdani's policies also include hiking taxes on New York City's wealthiest and raising the corporation tax, driving worries among the finance community that the city's competitiveness will suffer.

While New York's mayor has no direct oversight over Wall Street, the mayor sets the tone on whether the city is perceived as business-friendly.

Some heavyweights in finance had poured money into efforts to defeat Mamdani, including high-profile investors Bill Ackman and Dan Loeb.

Still, some are optimistic about Cuomo's chances. Worries tied to Mamdani's victory are "somewhat overexaggerated," said Peter Cardillo, chief market economist at Spartan Capital Securities in New York, who believes Cuomo may have a better chance to win than polls indicate, while as mayor Mamdani would face obstacles to implementing his proposals.

"Even if he should win, I don't think we're going to see the drastic program that he is proposing go into effect," Cardillo said.

Brian Gardner, chief Washington policy strategist at Stifel, cautioned that there could be an overreaction to a Mamdani win for implications for politics beyond New York.

"If he wins, a lot of ink will be spilled about the Democratic Party's move left," Gardner said in a note. "However, Mamdani seems likely to win with merely a plurality and has benefited from the opposition's inability to coalesce around a single credible candidate."

Wall Street also had its eyes on other races nationally, including in Virginia and New Jersey, which could give an indication of how voters are leaning ahead of next year's midterm elections, which decide which party will control Congress. The results could offer some insight into how Americans are thinking about the ongoing U.S. government shutdown and which political party is to blame.

If Republicans take a "big, big thumping," markets could see some volatility, said Alex Morris, chief investment officer at F/m Investments.

Still, a strong Democratic performance nationally on Tuesday that indicates the party will do well in the midterms also could be positive for some investors who prefer partisan "gridlock" in Washington. As it stands, Republicans hold the presidency and majorities in both the Senate and House of Representatives.

In Virginia, former U.S. Representative Abigail Spanberger, a Democrat, faces Winsome Earle-Sears, the state's Republican lieutenant governor. In New Jersey, Democratic U.S. Representative Mikie Sherrill is pitted against Republican businessman and former state lawmaker Jack Ciattarelli.

In another vote with implications for races next year, a California ballot measure would lead to redrawing congressional districts meant to help Democrats in the 2026 midterms.

"Both the Virginia and the New Jersey races will give us a picture in time of how the electorate stands at the moment, and that can let us make some kind of rough conclusions on the midterms," said Chris Grisanti, chief market strategist at MAI Capital Management in New York. "If it's a good night for the Democrats, then you're thinking that they're going to be more likely to take back the House next year."