The midterm elections could reshape the outlook for companies that depend heavily on Washington policy, with defense, healthcare, cryptocurrency and artificial intelligence standing out in particular.
If Democrats win either chamber of Congress, they would gain more investigative and oversight authority, along with leverage over the federal budget and must-pass legislation.
Even without controlling the White House, Congress can steer hundreds of billions of dollars in government spending and determine whether Trump-era regulatory changes become permanent. For many large American companies, government relations are themselves part of the business model. This midterm election will shift who holds the upper hand in policy battles.
If Democrats take the House, the Senate, or both, they could launch investigations, challenge federal spending, and extract concessions on legislation. But their power has limits: President Trump still holds veto power and broad executive authority over tariffs, immigration and federal regulation. Historically, stocks have often performed better under divided government, when the two parties split control of the executive and legislative branches. Analysis published by Morgan Stanley on Thursday showed that the S&P 500 has posted higher average gains when a Republican president faced a divided Congress, while average gains were lower when Democrats controlled both chambers. Analysts widely believe that a divided Congress tends to produce gridlock, discouraging large-scale aggressive policy and benefiting markets. Still, many analysts caution against assuming history will simply repeat itself.
Ariana Salvatore, head of U.S. public policy research at Morgan Stanley, said: "We don't think this historical pattern necessarily applies this time, but we still have ample reason to be bullish on U.S. equities." For investors, the midterms will determine which companies can preserve their policy advantages in Washington, with defense, healthcare services, banks and AI among the first affected.
The chief equity strategist at LPL Financial said: "Some policy changes are enough to move the market, or at least to have a clear impact on specific sub-sectors."
Congressional oversight and investigative powers
If Democrats win control of either the House or the Senate, they will gain committee chairmanships and subpoena power, allowing them to demand documents from companies, compel executives to testify and hold public hearings.
Signs of this are already emerging: Democratic Senator Richard Blumenthal of Connecticut, the top Democrat on the Senate Permanent Subcommittee on Investigations, is probing the secret donor funding behind the Trump White House ballroom, with companies including Cisco, Salesforce, ServiceNow and Kraken appearing on the donor list; records show Apple and Nvidia each contributed $25 million to the project. Democratic Representative Jamie Raskin of Maryland is seeking documents related to tariff exemptions, including communications linked to former Apple CEO Tim Cook, investigating whether Trump used trade policy to reward donors. A donation itself does not mean any illegality or improper influence, but congressional investigations carry their own risks: subpoenas consume significant management time, expose internal communications and generate unpredictable negative headlines. Few CEOs want to face lawmakers' questions on camera. Morgan Stanley's head of policy and geopolitical strategy said such negative headlines can easily create volatility and predicted that Democrats will launch investigations broadly, targeting the Trump family businesses, government contractors, affiliated entities tied to Donald Trump Jr.'s capital ventures, and Musk's companies such as SpaceX and Tesla.
Federal fiscal spending
One of Congress's most central powers is deciding where federal money goes. The nonpartisan health policy think tank KFF, citing Congressional Budget Office estimates, said Trump's 2025 tax-and-spending law is expected to cut federal Medicaid spending by $911 billion through 2034. Some states will begin implementing tighter Medicaid enrollment rules starting in January, squeezing state budgets, which means fewer enrollees and greater reimbursement pressure on healthcare providers. Molina Healthcare derived 75% of its 2025 premium revenue from Medicaid; the company's annual report warns that if government contracts are lost or renewal terms worsen, premium revenue could be materially affected. Even if Democrats control only one chamber, they cannot directly repeal the 2025 law, but they can seek to modify funding arrangements and delay some cuts during annual budget negotiations. Analysts believe Democrats will likely resist Medicaid cuts; preserving enrollment levels helps Medicaid insurers keep a stable customer base and supports stable hospital patient volumes.
Pressure on hospitals is equally pronounced: fewer insured patients mean more uncompensated care, and tight state budgets will lower reimbursement rates. Congress created a five-year, $50 billion rural healthcare subsidy, but both KFF and the American Medical Association say the funds are insufficient to offset the overall Medicaid reduction. The healthcare sector is a double-edged sword when it comes to a Democratic victory: Democrats want to preserve Medicaid funding, but they will also intensify scrutiny of insurers, hospitals and drugmakers over pricing, coverage and profits. Defense contractors, meanwhile, face congressional battles over funding for weapons programs. The White House's fiscal 2027 defense budget request is $1.5 trillion, plus a separate $87.6 billion supplemental request, mainly for military operations related to Iran.
A Democratic-controlled Congress may challenge spending related to Iran and Israel while pushing for aid to other allies. But several analysts note that there is bipartisan consensus on deterring China, modernizing nuclear forces and missile defense, making funding for major programs in those areas relatively safe. Budget disputes translate directly into billions of dollars in orders for contractors. Lockheed Martin, for example, has reached a framework agreement with the Pentagon to deliver 850 F-35s over a decade, but the multi-year procurement plan still requires congressional authorization and appropriations to proceed. Strategists advise picking individual stocks in the defense sector rather than betting on the whole industry; shipbuilding, autonomous systems and missile defense are seen as more likely beneficiaries.
The direction of regulatory rules
For the crypto industry, the midterms will determine whether Trump's regulatory framework can take lasting hold or will be overturned by the next administration. The industry's effort to codify regulatory rules in legislation suffered a setback in September, when a Senate procedural vote rejected the Trump-backed Clarity Act, a comprehensive bill covering the entire crypto market structure. Following the news, shares of Coinbase and stablecoin issuer Circle fell as much as 11%. Passing a bill comes at a price: with more Democratic seats, the party will use that leverage to demand stricter consumer protections, restrictions on interest-bearing stablecoins and greater scrutiny of Trump-linked crypto businesses. CFRA's chief investment strategist commented: "In some ways, the industry doesn't care who wins, they just want to know exactly what the regulatory rules will be for the coming year."
Banks are similarly hoping for a stable regulatory framework. The Federal Reserve's proposed capital rule changes are expected to lower capital requirements for large banks, freeing up hundreds of billions of dollars for lending and shareholder returns. The Fed holds rulemaking authority, but Senate confirmation votes determine future regulatory commissioners; congressional committees can also pressure regulators through hearings and investigations.
AI: the most complex policy battleground
Trump has made the rapid construction of AI data centers an economic and national security priority. Morgan Stanley forecasts that capital spending by cloud giants including Microsoft, Amazon, Google and Meta will collectively exceed $1 trillion in 2027. But AI infrastructure is facing growing public resistance: power consumption, water use and grid upgrade costs are fueling opposition. An October poll showed that 63% of registered voters oppose building a large AI data center within 10 miles of their home, with only 13% in support; opposition is even higher among Democratic voters. The tension has already reached Congress. In September, a proposal sought to require state regulators to force large data centers to bear the cost of supporting grid upgrades; the bill failed a procedural vote 57 to 43. Democrats argue that industry self-regulation is not enough and are demanding hard protections. The midterms will determine who holds the policy initiative. More Democratic seats would impose more cost constraints on tech companies, while grid bottlenecks are already limiting new projects. But Congress is not the only deciding factor: state regulators, utilities and local governments still control project interconnection and approval. Salvatore commented: the election will indeed have a substantive impact, but it will be highly localized.
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