AI darlings, defence shares most at risk as U.S. midterms near

Artificial-intelligence regulation, along with government spending on health care and defence are emerging as equity investors’ chief points of focus as the final month of the United States midterm campaign kicks into high gear.

Polls show the Democratic Party as a heavy favourite to win control of the House of Representatives, with an edge in key Senate races as well. Taking at least one chamber of Congress would give the party control of committees that can propose legislation and open investigations.

Concerns about AI cross party lines, with voters worried about potential risks along with job losses and higher electricity prices. Some Wall Street strategists are positioning for a push from Democrats for tighter regulation, which could fuel selling pressure.

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“The midterms will be critical not for the immediate risk of federal policy restricting data centres but to lay the groundwork for potential legislation toward that end in 2029,” Ariana Salvatore, head of U.S. public policy research at Morgan Stanley, said in a note.

History suggests that whatever happens, the midterm elections are unlikely to knock the stock market off its course. The S&P 500 index has risen in the 12 months after every midterm election since 1946, according to Wells Fargo. President Donald Trump’s veto powers can keep Democrats in check, a recipe for government gridlock that might create stability for investors. The Cboe Volatility index signals little election-related turmoil, making it cheap to bet on price swings picking up.

Compared with the 2024 presidential election, “the equity impact for the upcoming midterms across election outcomes scenarios will likely be more nuanced and favour stock picking,” JPMorgan Chase & Co. strategists led by Dubravko Lakos-Bujas wrote in a note.

Here are the sectors worth watching with less than a month to go before the vote.