Gridlock and roll

We usually leave the politics to the people in DC, but tomorrow’s midterms are too big for markets to ignore.

With affordability as the major theme this election, Democrats are poised to flip the House, while the Senate sits as a toss-up, with some outlets predicting a slight edge for the Dems. Either way, President Trump still holds the veto pen even if Democrats take one or both chambers, and we’re likely looking at divided government no matter what.

And Wall Street can live with that. Investors like gridlock because big changes to things like taxes or regulations are much harder to pass. According to Morgan Stanley, under Republican presidents, the S&P 500 has averaged a 23% gain in the year after midterms when Congress was split, and it gained 16% when Democrats controlled both chambers. So, divided government is not great for bureaucratic efficiency, but historically is great for returns.

The sectors on the ballot

Defense: Business is booming on paper. RTX and Northrop Grumman have record backlogs, meaning lots of orders they haven’t filled yet, and the White House wants $1.5 trillion for national defense in fiscal 2027. But Congress still has to fund these contracts, and a Democratic House could scrutinize spending more closely. Still, Bernstein expects defense investment spending to grow more than 10% next year.

Healthcare: The S&P 500 healthcare sector is already up more than 19% this year. Democrats could support more healthcare spending while pushing harder on drug prices, Medicare Advantage, and consumer costs. Some companies could benefit, while others could take a hit.

Big Tech: A Democratic majority would bring subpoena power and more leverage to investigate AI, antitrust, and other tech issues. Hearings themselves matter less to long-term investors than whether they eventually raise compliance costs, slow product rollouts, or make acquisitions harder.

Oil: Energy stocks have been among this year’s strongest performers, helped by the Iran war and refining margins. Democrats could challenge some Trump-era emissions and vehicle rules, though Trump could veto legislation. For Exxon and Chevron, what happens in the Middle East probably matters more than what happens on Capitol Hill.

The rules and regs

Data centers: Your electricity bill is now a swing voter. With 63% of registered voters opposing a data center within 10 miles of home, AI’s buildout has become a campaign issue instead of a tech story. Democratic gains could push more grid costs onto tech companies just as Microsoft, Amazon, Alphabet, and Meta are expected to spend over $1 trillion on projects next year. Higher costs, delays, or cancellations could then ripple through chip and power-equipment stocks.

Crypto: The election matters less for bitcoin’s price than for whether the industry gets durable rules. The Senate failed to advance the Clarity Act in September, and a Democratic Senate could make market-structure legislation harder to revive next year.

The election night map may be red and blue, but long-term investors should watch something less colorful: who ultimately bears the cost. —HC