Midterm elections could boost or hinder energy, tech stocks

Security and healthcare shares may benefit from a GOP win, while Democratic victories may boost cannabis and clean energy stocks

As Americans prepare for Tuesday's midterm elections to determine which party controls Congress, investors are expecting the races to significantly impact the stock market.

With polls showing a strong lead by Republicans in Congressional races and a dead heat in many Senate races, some traders are preparing for a GOP win. If not, political gridlock caused by a split government is also generally seen as favorable to investors who want their equities to be unaffected by major policy moves.

With the S&P 500 declining nearly 21% in the past year, investors appear to bet on a Republican win. A basket of stocks and other assets tracked by advisory firm Strategas that would be expected to do well after a Republican victory have outperformed a counterpart Democrat portfolio, indicating a roughly 70% chance that Republicans win both the House and Senate.

Defense spending is expected to rise regardless of which party takes power, signaling a positive future for shareholders. Experts say defense contractor shares such as Lockheed Martin (LMT.N) or Raytheon Technologies (RTX.N) would likely benefit significantly from a Republican sweep, as opposed to moderate growth with a Democratic majority.

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Pharmaceutical and biotech stocks are also projected to benefit from a Republican victory, considering recent legislation from Democrats that aimed at lowering prescription drug prices. While the S&P 500 pharmaceuticals index (.SPLRCCARG) is up about 1%, the S&P 500 healthcare sector (.SPXHC) is down roughly 7%.

Energy stocks have had an excellent year, with the S&P 500 energy sector (.SPNY) skyrocketing over 60% in 2022. If Republicans control both the House and the Senate, policies that encourage domestic energy production could be favorable for shareholders of oil exploration and pipeline companies.

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Clean energy stocks, on the other hand, will fare well if Democrats clinch a surprise win. While Invesco Solar ETF (TAN.P) is down roughly 6%, legislation favoring solar and other alternatives would boost the clean energy sector.

Cannabis stocks would also likely benefit from a Democratic win, as they historically move on regulatory headlines. The AdvisorShares Pure US Cannabis ETF (MSOS.P) is down over 55% this year.

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It is unclear how big tech stocks would benefit from any midterm election outcome. Citi analysts predict that a Republican majority would result in a "legislative standstill, implying an incremental positive for the category." The Nasdaq 100 index (.NDX), which is heavy on tech stocks, has fallen by approximately 33% in 2022.

Reuters contributed to this report.

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