Political Risk Returns to Wall Street

Political Risk Returns to Wall Street: what congressional elections mean for capital, the defense sector, and technology companies

Subheading: US midterm elections are taking place against the backdrop of energy pressure, geopolitical conflicts and highly valued AI companies. Why the outcome of the struggle between Democrats and Republicans can change market expectations – and which sectors may be most sensitive to the new configuration of power?

While US stock indices remain at high levels, the economic environment is becoming less predictable. The contradiction is obvious: investors continue to pay a significant premium for the future earnings growth of technology giants, while businesses and households face the consequences of expensive energy, the cost of credit and Washington’s foreign policy decisions.

In my view, the main mistake market participants can make now is to treat the midterm elections on November 3 as an ordinary political event, almost unrelated to quotes. The composition of Congress will determine not only the fate of individual bills, but also the Trump administration’s ability to finance its priorities, make budgetary decisions, regulate international trade and interact with the defense industry.

Strong indices do not refute stress in the economy. They may only reflect investors’ belief that political and macroeconomic threats can be overcome without serious losses. This belief will be tested in the coming weeks.

Why the November vote matters for asset prices

In November, Americans elect an entirely new House of Representatives and about a third of the Senate. The presidential post is not at stake in these elections. But the parliamentary majority will determine the conditions under which Donald Trump will continue to operate.

A Republican victory in both chambers means a relatively comfortable environment for White House legislative initiatives – primarily on taxes, government spending, energy and deregulation. However, this outcome in itself is not a signal to buy US stocks. A more aggressive foreign trade policy or growth in budget spending may raise inflationary expectations and Treasury yields, creating counter-pressure on the stock market.

If Democrats win the House but the Senate remains Republican, the US will enter a regime of tougher institutional bargaining. The role of parliamentary investigations, oversight, compromises on the budget and government funding deadlines will increase. This layout sometimes suits big business because it hinders abrupt changes in rules, but at the same time can create protracted budget conflicts.

If both chambers pass to Democratic control, the space for new Trump legislative initiatives will become even narrower. At the same time, the president’s powers in trade and foreign policy will remain, and measures already introduced will not automatically disappear. It is important not to confuse a change in parliamentary majority with an immediate reversal of all economic policy.

Confidently predicting the outcome of the vote is still premature. Dissatisfaction with the cost of living increases Democrats’ chances, but party geography of districts, voter mobilization and a limited number of competitive seats may limit the effect of national ratings. Therefore, from an investment point of view, it is better to analyze the consequences of each composition of Congress rather than build a portfolio around a single presumed winner.

Who finances political competition and what business wants

In US political economy, money and party ideology intersect, but do not always coincide. Industry associations, corporate political action committees, donations from company executives and employees, professional lobbyists – all these mechanisms help business convey its interests to legislators.

Here it is necessary to distinguish between registered lobbying, party-oriented political donations and independent expenditures of committees: these are different forms of participation. The very fact of financing a candidate does not prove that he votes at the donor’s direction.

Nevertheless, major industries have fairly stable priorities.

Traditional energy. Oil and gas companies more often find support among Republicans who advocate accelerating production, building infrastructure and reducing regulatory barriers. According to OpenSecrets, about 88% of party-distributed contributions from the oil and gas industry in the 2024 electoral cycle went to Republicans. But the financial results of Exxon Mobil, Chevron and their competitors are determined primarily by world oil prices, production costs, reserves and demand. Party victory is only one of the factors.

Big tech and AI. Software developers, cloud platforms, accelerator manufacturers and data center operators are interested in the tax regime for investments, energy infrastructure, antitrust rules, chip exports and access to international markets. Democrats usually place greater emphasis on platform regulation and competition; Republicans more often talk about reducing the administrative burden. But national technological competitiveness is important to both parties. NVIDIA, Microsoft, Alphabet, Amazon and Broadcom cannot be correctly divided into “Democratic” and “Republican” stocks.

Financial sector, venture capital and crypto industry. For them, the political process is a struggle for rules on capital raising, regulation of digital assets, tax conditions and legal certainty. Many structures finance both parties. In 2026, the crypto political action committee Fairshake announced support for 19 representatives and 13 Democratic candidates respectively. This example reflects the pragmatism of the industry: what matters to it is the composition of the future legislative majority capable of forming understandable norms for the digital market.

Defense contractors. The common notion that the American military-industrial complex belongs politically exclusively to Republicans does not correspond to the structure of donations. In the completed 2024 cycle, according to OpenSecrets, about 54% of party contributions from the defense sector went to Republicans and about 46% to Democrats. Preferences varied among different contractors. This is important: the defense industry is interested in long-term procurement programs and production loading regardless of which party controls Congress.

Geography cannot be forgotten either. A defense plant creates jobs, local supply chains and tax revenues in a specific district. Therefore, support for military orders can be found among legislators with completely different political views.

Republican rift: foreign policy promises and interests of the defense industry

A conflict within the Republican Party itself deserves special attention. Donald Trump tries to combine the demonstration of military force with the demand to reduce US external obligations and shift part of the costs to allies. For some supporters of the president this is a consistent “America First” principle. However, other Republicans believe that weakening support for Ukraine reduces Washington’s ability to contain Russia and harms the international reputation of the United States.

Here a contradiction arises, including with industrial logic. Arms deliveries to partners often imply subsequent orders to replenish American arsenals, expand production lines and modernize capacities. Political restrictions on the transfer of certain systems may change the timing of contract receipts and the structure of demand. Therefore, some legislators and participants in the defense ecosystem do not support attempts to too sharply limit military assistance to Ukraine.

This divergence has already manifested in votes: in June 2026, a Ukraine aid package worth over $8 billion passed the House with support from Democrats and 18 Republicans, despite objections from part of the party leadership. At the same time, the war with Iran intensified competition for limited stocks of missiles and anti-missile systems. US authorities are forced to balance between the needs of their own armed forces, obligations to allies and the capabilities of industry.

But here it is necessary to avoid simplifications. Trump did not “switch off” US defense production. On the contrary, the need to replenish expended stocks may stimulate new orders. The subject of the conflict is to whom and when to supply the produced weapons, which programs to give priority and at whose expense to expand capacities.

The market will assess the consequences of this policy through contracts, not slogans. In focus remain Lockheed Martin, RTX, Northrop Grumman, General Dynamics, L3Harris and Huntington Ingalls Industries. Their products and production competencies differ, but all of them to one degree or another depend on budget appropriations, government procurement and international defense programs.

Increasing military spending may support future contractor revenues, but between a political decision and a financial result lie production cycles, cost of goods sold, component deliveries and government procedures. Therefore, growing interest in the sector is not equivalent to guaranteed growth in its shares.

Why stock market highs do not mean economic well-being

On October 12, the S&P 500 closed the trading session at 7,807 points. However, the high level of the index in current conditions reflects primarily the ability of large issuers to maintain growth expectations. The economic position of the American consumer and individual industries may be significantly less stable.

At the center of tension today are several factors that can reinforce each other.

First – energy costs. The geopolitical crisis around Iran has added pressure on oil supplies, insurance and transportation. More expensive fuel is gradually reflected in logistics, air transportation, production costs and final consumer prices. This worsens the Fed’s ability to simultaneously support growth and keep inflation under control.

Second – price of money. Even if the stock market reacts positively to individual corporate reports, rising Treasury yields change the calculation of the fair value of future cash flows. Particularly sensitive are companies with high multiples and a significant portion of expected profits in the distant future. Under pressure may be both expensive technology stocks and real estate, small businesses and credit-dependent consumers.

Third – scale of investment in artificial intelligence. The AI boom already affects data centers, the energy system, semiconductors, cooling systems, network equipment and software developers. This is real investment activity, but market expectations regarding its payback may prove excessive. When company capitalizations grow faster than confirmed free cash flow, any adjustment of forecasts can cause a sharp revision of valuations.

Fourth – policy unpredictability. Changes in tariffs, sanctions regime or export rules can in one day cross out calculations on industry margins and demand. Elections do not create this risk from scratch, but can amplify it through the struggle for powers and the state budget.

The Fed itself points to the tense combination of an energy shock, the largest cycle of investment in AI and trade-political changes. For the investor this is an important signal: the stock market is under the influence of technological, monetary and geopolitical forces simultaneously, which do not always act in the same direction.

How real is the “black swan” risk

I am not inclined to declare every period of heightened volatility a harbinger of collapse. The market can adapt to high risks much longer than pessimists expect. However, the current construction raises concerns due to the concentration of expectations and the intersection of possible triggers.

Strictly speaking, a “black swan” is an unexpected event with large-scale consequences. Known threats such as war or inflation are not in themselves unexpected. But unlikely combinations of events and chain reactions can lead to shocks that the investor’s basic model does not foresee.

For example, a new disruption in oil logistics can simultaneously raise inflationary expectations and bond yields. If at the same moment large AI companies lower monetization forecasts for capital expenditures, the correction in technology stocks will intensify. An additional budget conflict in Washington can limit investors’ risk appetite, and forced closing of leveraged positions can spread the sell-off to cryptocurrencies and other liquid assets.

I do not claim that such a chain will necessarily materialize. But in conditions of high market interconnectedness, even an event of average scale can produce a disproportionate result. This is the central problem of the current moment: market participants may underestimate not individual threats, but the correlation between them in a stress phase.

Which market segments deserve maximum attention

Defense-industrial complex. I view the defense industry as a sector in which political decisions receive a fairly direct economic expression – through appropriations, order portfolios and export agreements. It is worth analyzing volumes of new contracts, speed of execution, operating margin, bottlenecks in missile and air defense production, plans for replenishing warehouses and Congress’s position on international deliveries. At the same time, a high probability of growth in defense spending does not yet mean that the corresponding premium is not reflected in stock valuations.

Artificial intelligence: technology or overvalued investment story? These are not mutually exclusive options. A technological shift may be fundamentally significant, while the shares of its leaders may be temporarily overheated. To evaluate NVIDIA and its partners, hyperscalers and infrastructure companies, I would compare revenue, margins, capital expenditures and free cash flow with current market expectations. Of particular importance is the question of how quickly customers will begin to extract real financial results from large-scale AI expenditures.

Broad stock indices. In a politically unstable environment, diversification becomes not a decorative principle but a way to reduce dependence on a single corporate story. However, the S&P 500 and Nasdaq-100 indices overlap substantially on the largest technology issuers. Therefore, it is useful to look not only at the number of instruments purchased but also at the actual weights of companies and sectors. Russell 2000 and Dow Jones have a different risk profile, but are also not protected from a general economic downturn. Real diversification requires taking into account other asset classes, their correlations and liquidity as well.

Cryptocurrencies. This market is simultaneously sensitive to political regulation, interest rate expectations and global liquidity. Movements in Bitcoin and Ethereum can accelerate against the background of messages from Congress, changes in market infrastructure and influx of speculative capital. At the same time, in episodes of flight from risk, cryptocurrencies often show sharper drawdowns than traditional indices. I would view them primarily as an indicator of market risk appetite rather than as unconditional protection against geopolitical shocks.

Conclusion: politics changes faster than companies’ fundamental indicators

US midterm elections can change the balance of power between the White House and Congress. But for the investor what matters is not the party slogan but the sequence of economic consequences: from voting on the budget – to government contracts, from a trade decision – to corporate margin, from inflation – to rates and market valuations.

Today, in my view, the American economy operates under conditions of noticeable stress. The energy factor, the cost of capital, geopolitical tension and inflated expectations in certain technology segments increase markets’ sensitivity to surprises. The risk of a sharp, non-standard shock cannot be ruled out, although it is impossible to predict a specific “black swan”.

That is why I would single out four directions as key for regular monitoring: shares of defense companies, sustainability of AI sector valuations, diversification through broad indices and dynamics of the cryptocurrency market. In addition, it is necessary to constantly monitor yields on US government bonds, inflation statistics, oil prices, Fed decisions and real budget initiatives of the new Congress.

In the coming months the market will have to reassess not only the probability of victory for one party or another, but also the price of political uncertainty. Discipline in risk assessment and understanding the links between politics, liquidity and corporate cash flows will be no less important than choosing a promising industry.

Dmitry Borisovich Blagodarsky

Head of the analytical department at TradePas