As Americans prepare for Tuesday’s midterm elections to determine which party controls Congress, investors expect the races to have a significant impact on the stock market.
With polls showing a strong Republican lead in congressional races and a stalemate in many Senate races, some traders are bracing for a GOP victory. Otherwise, the political stalemate caused by a divided government is also generally seen as favorable to investors who want their stocks unaffected by major political moves.
With the S&P 500 down nearly 21% over the past year, investors seem to be betting on a Republican victory. A basket of stocks and other assets tracked by advisory firm Strategas that is expected to do well after a Republican win outperformed a peer Democratic portfolio, indicating a roughly 70% chance Republicans will win both the House and the Senate.
Defense spending is expected to rise regardless of which party takes power, signaling a positive future for shareholders. Experts say stocks of defense contractors such as Lockheed Martin (LMT.N) or Raytheon Technologies (RTX.N) would likely benefit significantly from a Republican sweep, as opposed to moderate growth with a Democratic majority.
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Pharmaceutical and biotech stocks should also benefit from a Republican victory, given recent legislation by Democrats to reduce prescription drug prices. While the S&P 500 Pharmaceuticals Index (.SPLRCCARG) is up about 1%, the S&P 500 Healthcare Index (.SPXHC) is down about 7%.
Energy stocks have had a great year, with the S&P 500 (.SPNY) energy sector skyrocketing more than 60% in 2022. While Republicans control both the House and Senate, the policies that encourage domestic energy production could be favorable to shareholders of oil exploration and pipeline companies.
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Clean energy stocks, on the other hand, will do well if the Democrats land a surprise victory. While Invesco Solar ETF (TAN.P) is down about 6%, legislation promoting solar power and other alternatives would boost the clean energy sector.
Cannabis stocks would also likely benefit from a Democratic victory, as they have historically been in the regulatory headlines. The AdvisorShares Pure US Cannabis ETF (MSOS.P) is down more than 55% this year.
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It’s unclear how big tech stocks would benefit from a midterm election result. Citi analysts predict that a Republican majority would lead to a “legislative deadlock, implying an additional positive effect for the category.” The Nasdaq 100 Index (.NDX), which is heavily weighted towards tech stocks, fell around 33% in 2022.
Reuters contributed to this report.
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