Midterms put energy, defense, industrials in focus amid possible policy shifts

The outcome of Tuesday's U.S. midterm elections could reshape the outlook for some of Wall Street's biggest energy, industrial and materials companies as investors assess how changes in congressional control might affect federal spending, trade policy and regulation.

From Exxon Mobil XOM and Chevron CVX to Caterpillar CAT, Lockheed Martin LMT and SpaceX SPCX, companies with substantial exposure to government contracts, infrastructure spending and regulatory decisions face potentially significant policy shifts.

Republicans retaining both chambers would provide greater continuity for President Donald Trump's economic agenda. Democratic control of either chamber could complicate legislation, increase oversight and intensify negotiations over federal spending.

UBS Global Wealth Management, in an October 29 report, assigned a 50% probability to Democrats winning both chambers, 40% to Democrats capturing the House while Republicans retain the Senate and 10% to Republicans maintaining control of both.

However, UBS cautioned that divided government, Senate rules and presidential veto power would constrain major policy changes.

Wells Fargo Investment Institute similarly expects narrow congressional majorities and disagreements within parties to limit major legislation, while underlying economic trends remain the principal drivers of stock performance.

Defense stocks may find relief

Defense contractors have particularly direct exposure to congressional decisions because lawmakers authorize and appropriate funding for military programs.

Lockheed Martin LMT, RTX RTX, Northrop Grumman NOC, General Dynamics GD and Leidos LDOS could face changes in the pace and composition of defense spending if a divided Congress produces prolonged budget negotiations.

However, several Wall Street analysts argue that defense stocks have already absorbed much of the election-related uncertainty.

Stifel, in an October 28 report, said the defense spending cycle remains intact despite political concerns and declining stock valuations.

The firm expects an all-in fiscal 2027 defense budget of $1.08 trillion to $1.15 trillion, representing growth of approximately 8% to 14% from fiscal 2026.

Stifel's historical analysis found that the five major defense spending peaks since 1940 ended as geopolitical conflicts or tensions eased, rather than simply because of changes in congressional control.

The firm also found that defense spending has risen and fallen under Democratic congressional majorities, challenging the assumption that Democratic gains would necessarily hurt contractors.

UBS aerospace and defense analyst Gavin Parsons similarly argued in an October 19 report that the midterms could become a clearing event for defense stocks.

UBS said a roughly $1.1 trillion fiscal 2027 base defense budget remains possible even if Democrats gain congressional control, potentially easing concerns about spending cuts.

The firm identified Lockheed Martin LMT as a beneficiary of stronger, balanced defense budget growth and Northrop Grumman NOC as particularly well positioned for long-term growth because of its B-21 bomber and Sentinel missile programs.

Meanwhile, the approaching December 11 federal funding deadline could prove more consequential than Election Day itself.

UBS Global Wealth Management identified a potential connection between next year's debt-ceiling negotiations and military appropriations.

"The 2027 debt-limit negotiation could produce an agreement that softens scheduled social-program cuts and raises defense spending," UBS said.

Defense technology, government services

Smaller defense technology companies could face greater volatility because of their exposure to new weapons programs and supplemental appropriations.

RBC Capital Markets said defense contractors' third-quarter results have strengthened confidence in the sector, citing approximately 10% organic growth among major contractors and an average book-to-bill ratio of 3.4.

RBC favors defense suppliers Karman Holdings KRMN and Mercury Systems MRCY, although it cautioned that defense spending growth beyond fiscal 2027 could disappoint.

KeyBanc Capital Markets also sees opportunities in space and defense technology following a sharp valuation correction.

In a November 1 report, analysts Michael Leshock and Liam Baker cited missile replenishment, unmanned aircraft demand, growing satellite backlogs and constrained launch capacity as long-term growth drivers.

The firm reduced price targets on several companies, including AeroVironment AVAV, Kratos Defense & Security Solutions KTOS and Rocket Lab RKLB, reflecting budget uncertainty, higher interest rates and lower sector valuation multiples.

Stifel, meanwhile, identified government services companies as relatively defensive investments because of their lower sensitivity to the fiscal 2027 budget.

Its preferred names include CACI International CACI, while it also maintains favorable ratings on Science Applications International SAIC and Booz Allen Hamilton BAH.

UBS suggested Democratic congressional gains could benefit some government services contractors by improving the outlook for civilian-agency spending.

Leidos LDOS has approximately 30% of its revenue exposed to civilian government operations, compared with 29% for Booz Allen Hamilton BAH and 23% for SAIC SAIC, according to UBS.

SpaceX SPCX, meanwhile, has substantial exposure to NASA, military launches and satellite communications contracts, making government funding and procurement decisions important considerations.

For investors, the key distinction may be between established defense programs with long-term funding commitments and newer technologies that depend more heavily on incremental appropriations.

Oil, gas producers watch regulation

Exxon Mobil XOM, Chevron CVX, ConocoPhillips COP and Occidental Petroleum OXY face uncertainty over federal leasing, drilling permits and environmental regulations.

Republican control would generally support continuity in the administration's efforts to expand domestic fossil-fuel production. Democratic gains could increase oversight and potentially complicate legislative efforts to streamline permitting.

However, congressional control wouldn't automatically reverse executive-branch decisions.

Natural gas companies, including Cheniere Energy LNG, EQT EQT and Williams Companies WMB, also have exposure to federal decisions affecting pipelines and liquefied natural gas infrastructure.

Wells Fargo identified streamlined energy permitting as an area with potential bipartisan support, although its election scenarios also highlighted the risk of legislative gridlock.

The investment institute said faster permitting and greater domestic energy production could help offset inflationary pressures from tariffs and other policies.

For major producers, global crude prices, production volumes and refining margins will likely remain more important near-term earnings drivers than the election itself.

AI infrastructure's political risks

The rapid expansion of artificial intelligence data centers has created growing demand for electricity, cooling equipment and industrial infrastructure.

Eaton ETN, NextEra Energy NEE, Johnson Controls JCI, Trane Technologies TT and Honeywell HON have varying degrees of exposure to those investments.

UBS expects AI infrastructure investment to continue despite political disputes, citing strong demand and bipartisan support for technology investment.

"State and local rules will still influence project timing and location," UBS said.

Deutsche Bank offered evidence that political opposition hasn't yet significantly disrupted construction.

Citing SemiAnalysis research, the bank reported that more than 300 local data-center moratoriums had been adopted nationwide by September. However, only about 2.3 gigawatts of the 38 gigawatts of capacity planned or under construction for 2027 had encountered delays attributable to New York's state restrictions or local moratoriums.

Deutsche Bank said the effects have been limited partly because restrictions generally target new projects rather than developments already underway.

The bank also identified potential benefits for Trane TT and Johnson Controls JCI from renewed HVAC efficiency and refrigerant standards under divided government.

Wells Fargo highlighted bipartisan opportunities to protect electricity customers from rising infrastructure costs by requiring large data-center operators to shoulder more grid-upgrade expenses.

For investors, the issue isn't simply whether data-center construction continues, but whether regulatory obstacles delay projects and alter expected returns.

Tariff winners and losers

Trade policy presents a complicated outlook for manufacturers and basic materials producers.

Domestic steelmakers such as Nucor NUE, Steel Dynamics STLD and Cleveland-Cliffs CLF can benefit from tariffs that restrict lower-priced imports.

However, those same tariffs can raise costs for Caterpillar CAT, Deere DE, Parker-Hannifin PH, Honeywell HON and 3M MMM, which rely on industrial materials and international supply chains.

Caterpillar CAT and Deere DE also face exposure to retaliatory tariffs that could reduce overseas demand for American-made equipment.

"The executive branch will retain broad authority over tariffs, regardless of who controls Congress," UBS said.

Wells Fargo expects Democratic gains could increase oversight of tariff laws and exemptions, while continued Republican control could create opportunities to reinforce the administration's existing trade framework.

The upcoming review of the United States-Mexico-Canada Agreement also creates uncertainty for manufacturers with cross-border supply chains.

Deutsche Bank suggested globally exposed industrial companies could receive some trade-policy relief under divided government, although significant changes would remain constrained by presidential authority.

Aerospace's risks from trade, federal funding

Boeing BA and GE Aerospace GE face overlapping risks involving international trade, government oversight and defense spending.

Boeing's BA commercial aircraft business depends on global airline demand, while its defense operations rely on federal contracts. GE Aerospace GE supplies engines and services for commercial and military aircraft.

RTX RTX, Honeywell HON and Parker-Hannifin PH also have significant aerospace operations.

RBC Capital Markets said commercial aerospace sentiment has weakened despite resilient aircraft maintenance demand.

The firm noted that higher crude oil and jet fuel prices have increased uncertainty about airline profitability and aftermarket demand heading into 2027.

RBC also highlighted concerns about aircraft production rates, supply-chain constraints and pricing pressure on aerospace suppliers.

Although Airbus and Boeing remain on track toward their 2026 delivery targets, RBC warned that production levels continue to lag more optimistic industry expectations.

For aerospace investors, these operating pressures could prove more consequential than congressional election results, particularly if higher fuel costs weaken airline demand.

Gold, copper, critical minerals debated

Basic materials companies face additional uncertainty surrounding mining permits, trade restrictions and federal support for domestic mineral production.

Newmont NEM, a major gold producer, could be affected indirectly by changes in inflation expectations, Treasury yields and demand for safe-haven assets.

Freeport-McMoRan FCX and Southern Copper SCCO have greater exposure to industrial demand, copper prices and mining policy.

Wells Fargo said initiatives accelerating data-center construction and electrical-grid investment could strengthen demand for energy and industrial metals, while permitting decisions could affect supply growth.

MP Materials MP, a producer of rare-earth minerals, could face changes in congressional oversight of federal investments intended to strengthen domestic supply chains and reduce reliance on China.

Environmental policy could also affect WM WM, formerly Waste Management, and 3M MMM, particularly through changes in enforcement priorities and waste-management regulations.

Focus on earnings, not just election results

The election could influence federal spending, regulatory oversight and infrastructure investment, but analysts cautioned against treating historical midterm market patterns as reliable trading signals.

Deutsche Bank found that stocks delivered positive fourth-quarter returns in 21 of the previous 23 midterm election years, averaging a 7% gain.

However, the bank emphasized that sector performance has varied, with company-specific fundamentals and policy exposure often proving more consequential than the election cycle.

Wells Fargo similarly found little historical relationship between congressional control and economic growth. Its analysis showed average two-year real GDP growth of 5.33% under single-party control and 5.41% when control was divided.

The firm favors industrials and materials partly because of their exposure to AI investment and rising demand for data-center infrastructure.

"Growth, earnings, inflation, and interest rates will matter most," UBS said.

The election's longer-term consequences may emerge through defense appropriations, energy permitting, tariff negotiations and regulatory decisions rather than immediate changes in corporate profitability.

For investors in energy, industrials and basic materials, the challenge is determining which policy changes could materially affect earnings and which political developments are already reflected in stock prices.

Congressional control may change the direction of policy debates. Commodity prices, customer demand, financing costs and corporate execution will still determine whether companies deliver the returns investors expect.