Midterms could shift power over defense, health and AI spending
Democratic gains in Congress may alter funding rules for major sectors, though historical market trends suggest divided government often benefits stocks.
By Kwame Silva ·
Lockheed Martin derives roughly 70% of its sales from the U.S. government, while Medicaid accounts for three-quarters of Molina Healthcare's premium revenue. For these and other major firms, Washington is a core component of their business models. The upcoming midterm election could change which party holds the leverage to influence spending, regulation and oversight.
Morgan Stanley analysts noted that the S&P 500 has historically averaged a 23% gain in the year following midterm elections when Congress was split under a Republican president. This compares to a 16% average when Democrats controlled both chambers. Ariana Salvatore, head of U.S. public policy research at Morgan Stanley, cautioned that this historical pattern may not hold this time, though she remains constructive on the U.S. equity market.
Democratic control of either chamber would grant the party committee chairs and subpoena power. This authority would allow lawmakers to demand documents and compel testimony from executives. Sen. Richard Blumenthal, D-Conn., has already sought records from major donors regarding the White House ballroom. Rep. Jamie Raskin, D-Md., is investigating tariff exclusions and communications involving Apple's former CEO Tim Cook.
Healthcare funding is a primary point of contention. The 2025 tax and spending law is projected to cut federal Medicaid spending by $911 billion through 2034. Molina Healthcare generated $32.2 billion from Medicaid in 2025. Jeff Buchbinder, chief equity strategist at LPL Financial, said Democrats are likely to push back on these cuts during budget negotiations to stabilize enrollment for insurers and patient volumes for hospitals.
Defense spending will also face scrutiny. The White House has requested $1.5 trillion for national defense for fiscal 2027, including an $87.6 billion supplemental appropriation for operations related to Iran. A Democratic Congress could challenge specific Iran-related spending while potentially increasing aid to Ukraine. Lockheed Martin has a framework agreement for 850 F-35 jets, but Congress must still authorize the funding.
In the crypto sector, the failure of the Senate to advance the Clarity Act in September caused shares of Coinbase and Circle to drop as much as 11%. Democratic gains could give lawmakers more leverage to demand stricter consumer safeguards. Sam Stovall, chief investment strategist at CFRA Research, stated that the industry is primarily concerned with knowing the rules for the coming year rather than which specific party wins.
For artificial intelligence, political friction is intensifying. A CNBC survey found that 63% of registered voters oppose having a data center within 10 miles of their home. The House passed a bill in September requiring state regulators to consider making data centers cover infrastructure costs, but the measure stalled in the Senate. Morgan Stanley expects hyperscalers to spend more than $1 trillion on capital projects in 2027, a figure that may face pressure from state and local regulators regardless of federal outcomes.
