US Midterm Elections Enter Final Stretch: AI Regulation, Medical Subsidies, and Defense Budget Become Wall Street's Three Main Trading Themes—Which Sectors Are Most at Risk?
As the US midterm election campaigns enter the final month of intense competition, AI regulation and government spending in the medical and defense sectors are becoming the primary focus for stock investors.
According to Zhitong Finance APP, as the US midterm election campaign enters its final month of heightened intensity, government spending in artificial intelligence (AI) regulation, healthcare, and defense has become the primary focus for stock market investors.
Polls show that the Democratic Party is favored to win control of the House of Representatives and holds an advantage in key Senate contests. Securing control of at least one chamber of Congress would give Democrats command over committees that can introduce legislation and initiate investigations.
Concerns around AI cross party lines, with voters worried about both potential risks and issues such as unemployment and rising electricity costs. Some Wall Street strategists are preparing for the possibility of Democrats pushing for tighter regulation, which could add to selling pressure in related sectors.
"The key to this midterm election isn't the immediate risk of federal policies restricting data centers, but rather laying the groundwork for legislation that may emerge in 2029," said Ariana Salvatore, Head of US Public Policy Research at Morgan Stanley, in a report.
Nevertheless, history suggests that midterm elections are unlikely to significantly derail the stock market regardless of outcome. According to Wells Fargo, since 1946, the S&P 500 Index has risen in the 12 months following every midterm election. The president’s veto power, currently held by Trump, can serve as a check on Democrats, and this kind of government gridlock might actually provide a degree of stability for investors. The Chicago Board Options Exchange Volatility Index has not signaled obvious election-related turbulence, making bets on increased price volatility relatively inexpensive.
Compared with the 2024 presidential election, “the impact of the upcoming midterm elections on the stock market under different result scenarios may be more nuanced and favorable to stock selection,” wrote JPMorgan strategists led by Dubravko Lakos-Bujas in a report.
As the vote approaches with less than one month to go, Wall Street analysts believe the following sectors deserve special attention.
Technology & AI Infrastructure
Over the next two years, Trump is likely to veto any legislation that is too adverse to the tech industry. This could limit fundamental risks for AI bellwether Nvidia (NVDA.US) as well as tech giants like Alphabet (GOOGL.US), Meta Platforms (META.US), and Microsoft (MSFT.US).
Morgan Stanley analysts said data center REITs and new cloud providers will be directly impacted by any proposed computing power taxation legislation, while off-grid power suppliers such as Bloom Energy (BE.US), GE Vernova (GEV.US), and Cummins (CMI.US) could get a boost from stricter policies.
Healthcare
Tobin Marcus, Head of US Policy and Politics at Wolfe Research, stated that if Democrats succeed in reversing Medicaid cuts contained in last year’s tax and spending bill, the hospital sector may benefit.
He pointed out that if Democrats seek concessions in next year’s possible debt ceiling negotiations, they may seek policy achievements in the healthcare sector.
According to Jefferies analysts, hospital stocks such as Acadia Healthcare (ACHC.US), HCA Healthcare (HCA.US), and Tenet (THC.US) could see short-term upside driven by the elections. Insurers Centene (CNC.US) and Oscar Health (OSCR.US) may see buying interest from expectations that Democrats will renegotiate the reinstatement of enhanced Affordable Care Act subsidies that expired at the end of last year, though Jefferies believes the probability of restoring these subsidies is low.
Defense Sector
Defense contractor stocks have lagged this year, given concerns that a Democrat-controlled Congress could bring stricter regulation and delays in defense appropriations. Melius Research noted that this has created a "very broad" range of outcomes for fiscal year spending starting October 1. Analyst Scott Mikus wrote in a report that if legislative gridlock means the Department of Defense operates on short-term funding all year, the budget could effectively shrink by 15%.
JPMorgan stated that if Republicans hold both chambers, military spending could rise and become a positive catalyst. The firm's analysts noted L3Harris Technologies (LHX.US), Lockheed Martin (LMT.US), and Northrop Grumman (NOC.US) as potential beneficiaries.
Financials & Cryptocurrency
Republicans tend to favor looser regulations for the financial sector, leading JPMorgan analysts to predict that a Republican sweep could benefit banks such as Bank of America (BAC.US), Citigroup (C.US), and Wells Fargo (WFC.US).
However, independent agencies and executive departments hold significant power over regulatory policy. Barclays analyst Jason Goldberg said in an interview that with the heads of the Federal Reserve, Federal Deposit Insurance Corporation, and Office of the Comptroller of the Currency likely to remain in place for years, the election is unlikely to affect issues such as bank stress testing.
In the cryptocurrency space, if Democrats control Congress, the likelihood of any legislation passing may decrease. In September, Democrats, along with a few Republicans, blocked the advance of the "Clarity Act," causing stocks such as Coinbase Global (COIN.US) and Circle Internet Group (CRCL.US) to plummet.
Real Estate Sector
Initiatives proposed by Trump and housing official Bill Pulte to address housing affordability have been few and largely ineffective. September data showed the median home sales price up 1.6% year-over-year to $429,100. Combined with spiking mortgage rates, this has put pressure on homebuilders and related sectors. The S&P 500 Homebuilders Index has fallen 25% since its mid-February peak.
PennyMac Head of Public Policy Isaac Boltansky said that after the midterms, Congress may place greater focus on housing. Boltansky said that easing constraints on housing supply will become "a long-term bipartisan consensus, providing a clear policy lever for the new Congress."
Recently, Pulte again criticized credit rating companies, pressuring shares of Fair Isaac (FICO.US) and TransUnion (TRU.US). Mortgage finance giants Fannie Mae (FNMA.US) and Freddie Mac (FMCC.US) surged after Trump’s 2024 victory, on optimism that the government would deregulate. Since then, as any potential action has stalled, shares in both have pared gains.
Potential Investigation Targets
Wall Street is also preparing for the possibility of Democrats holding hearings and initiating large-scale investigations. Evercore ISI told clients that investigations into AI could create market risks. The firm also expects Congress to investigate sectors with high voter concern, including energy, healthcare, food, and agriculture.
Strategists also cautioned that companies in which the US government holds equity stakes may face regulatory scrutiny, posing risks to their brand and stock prices. This broad category includes chipmaker Intel (INTC.US), established tech company IBM (IBM.US), and rare earth producer MP Materials (MP.US).
Disclaimer: The content of this article solely reflects the author's opinion and does not represent the platform in any capacity. This article is not intended to serve as a reference for making investment decisions.
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