Wall Street expects Democrats to win at least one of the houses of Congress in the US midterm elections on Tuesday, setting the stage for a potentially volatile ride in the stock and bond markets with artificial intelligence oversight, defense spending and crypto legislation on the table.
A UBS basket of stocks tied to Republicans has plunged since hitting a peak in August, badly lagging the S&P 500 Index. One major area where this could show up is in the AI trade that has been driving the stock market for the past few years, as Democrats are expected to push for stricter regulation and oversight of the technology. Meanwhile, local governments are under pressure to block data centers from being built in their communities.
If the “big political takeaway” from the election is that “data centers are bad, that would be impactful for growth,” said Robert Waldner, chief investment officer at Invesco Advisers Inc.
At the same time, other industries could be in the crosshairs. If the Democrats push to rein in defense spending, military contractors would likely feel the pinch. Big banks that have been raking in profits on a flood of deals could face scrutiny. And firms tied to cryptocurrencies are likely to catch some Congressional heat simply based on the industry’s close ties to the Trump family.
All of which has some Wall Street pros positioning for selling pressure in stocks and demand for safer government bonds. In addition, many traders appear to be so locked into their positions and their expectations for a closely divided Congress that they’re vulnerable to volatile swings.
“Investors are heading into the election long the dollar and short duration, with little protection against volatility – particularly in equity markets,” Corpay strategist Karl Schamotta said. “The consensus expects a narrow Democratic victory to produce gridlock in Congress, leaving the president to pursue his objectives through executive action, but there are significant tail risks.”
Here are the markets and equity sectors worth watching with just days to go before the vote.
Treasuries
History suggests Congressional gridlock is good for bonds by preventing ambitious policies that increase deficits and raise yields on longer-dated Treasuries. This time, however, bond watchers say any fiscal relief will be limited and unlikely to generate a sustained rally because the deficit, at roughly 6% of the economy, has rarely been this large outside of a recession.
“We have way too much debt that will be reckoned with at some point,” said Oliver Chambers, head of fixed income SMA at Clark Capital Management. “But if for the next two years, gridlock means we don’t add to it at the same rate we’ve been adding to it, I think that’s a good thing.”
A particularly strong showing by Democrats could lead to lower Treasury yields if investors see it as a sign of Americans’ appetite for AI regulation, which would pressure tech stocks and dent expectations for economic growth.
The Dollar
Like Treasuries, the dollar could get a boost from a Democratic victory based on the same anticipated stabilizing effect of a split Congress.
Some investors believe a divided government could lead President Donald Trump to lean on policies he can implement unilaterally through executive power. Any escalation with Iran, which Trump has suggested may come after the election, is expected to continue supporting the dollar by driving up energy prices and pushing the Federal Reserve to raise interest rates. New tariffs could also support the US currency by stoking inflation — unless they spark a global “sell America” trade like the one that became popular last year.
Technology and AI Infrastructure
Regardless of what happens in the midterms, Trump will still be president and is likely to veto any legislation that’s considered unfavorable to the technology industry. That may limit risk for chipmaker Nvidia Corp. and the major AI spenders like Alphabet Inc., Meta Platforms Inc. and Microsoft Corp. Still, strategists are bracing for Democratic outperformance to hurt sentiment around the AI trade.
“The midterms will be critical not for the immediate risk of federal policy restricting data centers but to lay the groundwork for potential legislation toward that end in 2029,” said Ariana Salvatore, head of US public policy research at Morgan Stanley.
Data center real estate investment trusts and neocloud companies are exposed to proposals for a tax on computing power, according to Morgan Stanley analysts. On the other hand, off-the-grid power providers like Bloom Energy Corp., Cummins Inc. and GE Vernova Inc. may get a boost from more restrictive policies, the analysts wrote.
Healthcare
Hospitals may benefit if Democrats manage to walk back Medicaid cuts included in last year’s tax bill, said Tobin Marcus, head of US policy and politics at Wolfe Research. Democrats looking for concessions in a possible debt ceiling negotiation may seek wins in healthcare, he said.
Hospital names like Acadia Healthcare Co., HCA Healthcare Inc. and Tenet Healthcare Corp. have near-term upside linked to the election, according to Jefferies analysts. Insurers Centene Corp. and Oscar Health Inc. also could catch bids on hopes that Democrats will negotiate to restore enhanced Affordable Care Act subsidies that expired at the end of last year, though the firm considers that outcome unlikely.
Defense
Shares of defense contractors have underperformed this year amid worries that a potential Democratic sweep would lead to tighter oversight and funding delays. Drone stocks such as AeroVironment Inc. and Kratos Defense & Security Solutions Inc. have had some of the biggest declines. If the Democrats take control of one or both chambers, funding that’s critical for the Pentagon’s ambitious drone production plans may be in jeopardy.
If Republicans hold their ground, however, military spending could rise, according to JPMorgan, which points to L3Harris Technologies Inc., Lockheed Martin Corp. and Northrop Grumman Corp. as possible beneficiaries.
Financials and Crypto
Republicans tend to favor lighter oversight of the financial sector, so a surprise sweep by the party would favor lenders such as Bank of America Corp., Citigroup Inc. and Wells Fargo & Co., according to JPMorgan.
However, the election is unlikely to alter issues like bank stress testing, since the heads of the Fed, Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency are likely to remain in place for several years, Barclays analyst Jason Goldberg said.
In cryptocurrencies, the odds for any legislation supporting the industry may decline if Democrats take control. Democrats, along with a few Republicans, blocked the Clarity Act in September, sending stocks such as Coinbase Global Inc. and Circle Internet Group Inc. tumbling.
Potential Investigation Targets
Wall Street is bracing for Democrats to launch a range of investigations. Hearings focused on AI could create market risk, according to Evercore ISI, and companies like Nvidia and Amazon.com Inc. have already been hit with investigative inquiries from Democrats. Evercore also expects probes into industries tied to affordability issues, such as energy, healthcare, food production and agriculture.
Companies that have received equity investments from the US government, like Intel Corp., International Business Machines Corp. and rare earth producer MP Materials Corp. could also face inquiries, creating risk to their shares.
Elon Musk’s Empire
The Democrats winning one or both houses of Congress could have implications for major Republican donor Elon Musk’s companies — Tesla Inc. and SpaceX — as investors are anticipating a possible merger of the two. Though Congress can’t single-handedly kill a deal, empowered Democrats would be able to slow it down, according to First New York’s Vikram Rai.
“Both of these stocks have major headline risk if we get a blue sweep,” he said.
