US midterm elections enter the final sprint month: AI regulation, healthcare subsidies, and defense budget become Wall Street's three major trading themeswhich sectors are most at risk?

Title context: US midterm elections enter the final sprint month: AI regulation, healthcare subsidies, and defense budget become Wall Street's three major trading themeswhich sectors are most at risk? Text: As the US midterm election campaign enters its final, white-hot month, government spending on artificial intelligence (AI) regulation, healthcare, and defense is becoming the central focus for stock investors. Polling shows Democrats are favored to win control of the House and hold an advantage in key Senate races. Winning at least one chamber of Congress would give Democrats control of committees able to propose legislation and launch investigations. Concerns surrounding AI cut across party lines, with voters worried about both potential risks and job losses and rising electricity prices. Some Wall Street strategists are positioning for Democrats to push for stricter regulation, which could intensify selling pressure on related sectors. "The key to this midterm election is not the immediate risk of federal policy restricting data centers, but rather laying the groundwork for legislation that could be introduced in 2029," said Ariana Salvatore, head of US public policy research at Morgan Stanley, in a report. Still, history shows that no matter what happens, midterm elections are unlikely to knock the stock market off course. According to Wells Fargo & Company, since 1946, the S&P 500 has risen in the 12 months following every midterm election. US President Donald Trump's veto power can check Democrats, and such divided government may actually create stability for investors. The Cboe Global Markets Inc volatility index has not signaled election-related turmoil, making it cheaper to bet on increased price swings. Compared with the 2024 presidential election, "the upcoming midterm elections may have a more nuanced impact on the stock market under different election outcome scenarios, and be more favorable for stock picking," JPMorgan strategists led by Dubravko Lakos-Bujas wrote in a report. Therefore, with less than a month until voting, Wall Street analysts believe the following sectors are worth close attention. Technology and AI infrastructure Over the next two years, Trump is likely to veto any legislation too unfavorable to the tech industry. That could limit fundamental risks for AI bellwether NVIDIA Corporation (NVDA.US) as well as large tech giants such as Alphabet (GOOGL.US), Meta Platforms (META.US), and Microsoft Corporation (MSFT.US). Morgan Stanley analysts said data center REITs and neocloud providers will face the direct impact of potential legislative proposals for a compute tax, while off-grid power providers such as Bloom Energy (BE.US), GE Vernova (GEV.US), and Cummins Inc. (CMI.US) could get a boost from stricter policy. Healthcare Tobin Marcus, head of US policy and politics at Wolfe Research, said the hospital sector could benefit if Democrats succeed in reversing the Medicaid cuts included in last year's tax and spending bill. He noted that if Democrats seek concessions in a possible debt ceiling negotiation next year, they may pursue policy gains in healthcare. Jefferies analysts said hospital stocks such as Acadia Healthcare Company, Inc. (ACHC.US), HCA Healthcare (HCA.US), and Tenet (THC.US) have short-term election-driven upside. Insurers Centene Corporation (CNC.US) and Oscar Health (OSCR.US) could see buying on expectations that Democrats will negotiate to restore enhanced Affordable Care Act subsidies that expired at the end of last year, though the firm believes the probability of restoring those subsidies is low. Defense sector Defense contractor shares have lagged this year on concerns that Democrats could win control of Congress, leading to stricter regulation and delays in military funding. Melius Research said this sets up a "very wide" range of outcomes for spending in the fiscal year beginning October 1. Analyst Scott Mikus wrote in a report that if legislative gridlock means the Department of Defense has to operate on temporary funding all year, its budget would effectively shrink by 15%. JPMorgan said that if Republicans hold both chambers, military spending could trend higher and become a positive factor. Its analysts noted that L3Harris Technologies (LHX.US), Lockheed Martin Corporation (LMT.US), and Northrop Grumman Corp. (NOC.US) could be beneficiaries. Financials and cryptocurrency Republicans tend to favor lighter regulation of the financial industry, prompting JPMorgan analysts to predict that a Republican sweep could benefit banks such as Bank of America Corp (BAC.US), Citigroup (C.US), and Wells Fargo & Company (WFC.US). However, independent agencies and the executive branch hold substantial power over regulatory policy. Barclays analyst Jason Goldberg said in an interview that because the heads of the Federal Reserve, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency may remain in place for years, elections are unlikely to change matters such as bank stress tests. On cryptocurrency, if Democrats control Congress, the odds of any legislation passing could fall. Democrats and a handful of Republicans blocked the Clarity Act in September, sending stocks such as Coinbase Global (COIN.US) and Circle Internet Group (CRCL.US) sharply lower. Real estate sector The measures proposed by Trump and housing official Bill Pulte aimed at addressing housing affordability have been few and have rarely worked. September data showed the median home sale price rose 1.6% year over year to $429,100. Combined with surging mortgage rates, this has pressured homebuilders and related sectors. The S&P 500 homebuilder index has fallen 25% since its mid-February peak. Isasc Boltansky, head of public policy at PennyMac, said that after the midterm elections, Congress may increase its focus on housing. Boltansky said easing housing supply constraints will become a "long-term bipartisan consensus, providing a clear policy anchor for the new Congress." Recently, Pulte again criticized credit scoring companies, weighing on shares of companies such as Fair Isaac (FICO.US) and TransUnion (TRU.US). Mortgage finance giants Fannie Mae (FNMA.US) and Freddie Mac (FMCC.US) surged after Trump's 2024 victory on optimism the government would deregulate. Since then, with any potential action appearing stalled, both stocks have pulled back. Potential investigation targets Wall Street is also preparing for Democrats to hold hearings and launch broad investigations. Evercore ISI told clients that investigations into AI could create market risk. The firm also expects Congress to investigate sectors tied to issues of high voter concern, including energy, healthcare, food, and agriculture. Strategists also warned that companies that have received US government equity investments may face regulatory scrutiny, posing risks to their brands and share prices. Such targets are broad and include chipmaker Intel Corporation (INTC.US), legacy tech company IBM (IBM.US), and rare earth producer MP Materials (MP.US).