Midterm Outlook: Corporate Exposure to Washington Policy

Corporate earnings in several major industries remain heavily dependent on federal policy decisions. The upcoming midterm election could alter the balance of power in Washington, directly affecting revenue streams for defense contractors, healthcare providers, and technology firms. These companies face distinct risks based on which party controls the House or Senate.

Morgan Stanley analysts note that historical data suggests stocks perform better under divided government. Under Republican presidents, the S&P 500 has gained an average of 23% in the year following midterms when Congress was split. That figure stands in contrast to a 16% average gain when Democrats controlled both chambers. Ariana Salvatore, head of U.S. public policy research at Morgan Stanley, stated that the market remains constructive despite these historical patterns.

Democratic gains would grant lawmakers subpoena power and committee control. This authority allows for investigations into government spending and corporate dealings. Sen. Richard Blumenthal recently sought records from major technology firms regarding the White House ballroom project. Rep. Jamie Raskin has also pursued documents related to tariff exclusions and communications involving former Apple CEO Tim Cook. Monica Guerra, Morgan Stanley’s head of policy and geopolitical strategy, warned that such probes create market volatility through negative headlines.

Healthcare companies face specific pressure from Medicaid funding rules. The One Big Beautiful Bill passed in 2025 projects a $911 billion reduction in federal Medicaid spending through 2034. Molina Healthcare relies on Medicaid for 75% of its premium revenue. A Democratic-controlled chamber could negotiate budget changes to delay these cuts. Jeff Buchbinder, chief equity strategist at LPL Financial, noted that preserving coverage helps stabilize insurer enrollment and hospital patient volumes.

Defense contractors depend on congressional authorization for major procurement programs. The White House requested $1.5 trillion for national defense in fiscal 2027. It also sought an $87.6 billion supplemental appropriation for fiscal 2026, largely for Iran-related military operations. Lockheed Martin has a framework agreement for 850 F-35 jets, but Congress must still authorize and fund the purchase. Analysts suggest that while Iran spending may face scrutiny, programs related to China deterrence and missile defense retain bipartisan support.

The cryptocurrency industry awaits permanent market structure rules. The Senate failed to advance the Clarity Act in September, causing shares of Coinbase and Circle to drop as much as 11%. Democratic leaders may demand stricter consumer safeguards and tighter scrutiny of presidential crypto interests. Sam Stovall, chief investment strategist at CFRA Research, observed that industry participants primarily seek clarity on regulatory rules for the coming year.

Technology firms face growing political friction over data center construction. A CNBC survey found that 63% of registered voters oppose having a data center within 10 miles of their home. The House voted 417-3 in September to require state regulators to consider cost-shifting for large data centers. That measure stalled in the Senate on a 57-43 procedural vote. Democratic gains could lead to stricter requirements for tech developers to cover grid upgrade costs, potentially raising project expenses.