The Midterm Elections Could Shake Up Wall Street. These Sectors Have the Most at Stake

Midterm elections don't usually send stocks into a frenzy overnight, but they can change which industries have Washington on their side for the next two years. With control of Congress and several key state offices up for grabs on November 3, investors are watching healthcare, energy, defense, and AI infrastructure particularly closely.

History offers some reassurance. The S&P 500 has posted positive returns in 95% of the 12-month periods following midterm elections over the past seven decades, according to Fidelity. That doesn't mean every sector will come out ahead, though.

Prediction markets currently favor Democrats. Polymarket puts the odds of a Democratic sweep at 62%, compared with 29% for a split Congress and just 9% for Republicans retaining both chambers.

Healthcare has plenty riding on Congress

Healthcare could see some of the biggest policy changes if Democrats take control. Lawmakers would likely push to reverse last year's Medicaid cuts and bring back enhanced Affordable Care Act subsidies, which helped millions afford insurance before expiring.

Capital Alpha's Kim Monk expects Democrats to pursue a major healthcare bill in 2027. Getting it past President Trump would be another matter, however, since he could veto legislation that reverses his administration's cuts.

Even limited relief could help insurers such as Centene, Molina, and Oscar Health, which serve patients relying on government-supported coverage. Hospitals including HCA Healthcare and Tenet Healthcare could also benefit, since more insured patients generally means fewer bills going unpaid.

Food assistance is another area worth watching. Delaying cuts to the Supplemental Nutrition Assistance Program would leave households with more money for groceries, offering some support to food retailers and consumer staples companies.

Clean energy could catch a break

Renewable energy companies have spent much of the past year dealing with shrinking federal support. A Democratic Congress could give them some breathing room, even if restoring incentives proves difficult.

Veda Partners' Henrietta Treyz expects clean-energy tax credits to become a priority, potentially as part of negotiations over the debt ceiling. Wind-equipment manufacturers such as Vestas would stand to benefit if developers regain access to those incentives.

Democrats wouldn't need the White House to make life more difficult for agencies holding up renewable projects, either. Control of congressional committees would allow them to investigate permitting decisions, question officials, and scrutinize the cancellation of offshore wind leases.

That could improve sentiment toward renewable stocks, although investigations alone won't bring back tax credits or get stalled projects built.

AI infrastructure faces a political headache

The AI boom has created enormous demand for electricity, and communities are increasingly questioning whether they should foot the bill.

That makes the races for governor and state utility commissions especially important. These officials influence where data centers can be built, how quickly they receive permits, and whether households or technology companies pay for electricity upgrades.

Opposition is already widespread. A Gallup survey found that 70% of Americans oppose new AI data centers in their communities. New York has also paused approvals for large new facilities since July.

A Democratic sweep could bring tougher scrutiny, adding uncertainty for data-center developers, utilities, and industrial companies supplying the build-out. Existing facilities may be better positioned than projects still waiting for permission to connect to the grid.

Banks and fossil-fuel producers face a different set of concerns. Democrats could step up oversight of financial institutions and investigate oil-company profits, while tougher permitting reviews could complicate new energy projects.

Defense spending is harder to call

Defense contractors don't fit neatly into either party's winning column. Republicans generally favor higher military spending, but a divided Congress could still produce a compromise that benefits the industry.

Betashares' Cameron Gleeson suggests lawmakers might agree to smaller healthcare cuts in exchange for additional defense funding, particularly with tensions in the Middle East keeping military readiness in focus.

A Democratic sweep, however, would likely end the proposed Reconciliation 3.0 package, removing $73B in planned defense funding alongside $12B in agricultural aid.

That leaves contractors dependent on what replaces the proposal. Companies tied to essential military programs could fare better than those counting on additional spending that Congress hasn't approved.

What investors should watch

Bank of America considers a Republican sweep the most bullish surprise for US stocks, largely because it would preserve the administration's deregulatory agenda. A Democratic sweep could initially weigh on equities, push Treasury yields lower, and favor international markets.

Some investors are already preparing for volatility. VP Capital is holding more cash and reducing exposure to high-growth technology stocks, while Schroders has purchased put options to protect against a sharp market decline.

A split Congress would create its own problems, particularly around government funding and debt-ceiling negotiations. It could also leave major healthcare and energy policies largely unchanged.

For investors, healthcare providers and insurers offer relatively direct exposure to a potential Democratic victory, while renewable energy companies could benefit from renewed political support. Banks and AI infrastructure face greater uncertainty, and defense depends on whether lawmakers can agree on another spending package.

The election itself may be over in a day, but the policy decisions that follow could influence these industries for years. The important distinction is between companies that need Washington to change course and those that can keep growing regardless of who controls Congress.