The US midterm elections became a “litmus test” for defense stocks: the trillion-dollar military expansion faces congressional tests

The Zhitong Finance App learned that the US midterm elections are becoming a key test to test investors' sentiment towards the rapidly growing defense sector. Market observers say that US President Trump is seeking to raise the military budget by more than 40% to about 1.5 trillion US dollars, but whether this plan can be implemented depends largely on whether the Republican Party can maintain control of Congress.

Sheila Kajaolu, managing director of equity research at Jefferies Financial Group, said on Wednesday: “This is a big risk.”

Despite rising political uncertainty, those who are optimistic about the defense sector believe that opportunities still exist. The wars in Europe and the Middle East are draining stocks of weapons, and it is difficult for traditional defense contractors to quickly replenish these stocks, which supports demand in related industries.

Ward McNally, founder and managing partner of Chicago private equity firm McNally Capital, said, “This administration has always supported public-private partnerships, which are beneficial to all participants, whether early-stage tech companies or more established businesses.”

New technologies used in conflict zones, such as drones, as well as parts and supply chains for the defense sector, are areas of interest to investors.

“Everything from raw materials to metal parts to defense electronics is at the top of the watch list,” said Anita Antenucci, founder and managing partner of 3Wire Partners, a consulting and commercial banking company.

According to several recent polls, the Democratic Party candidate's approval rating was significantly higher than that of the Republican Party in the general vote test for the midterm congressional elections. Predictive market and institutional analysis generally believe that the Democratic Party's recapture of the House of Representatives is a probable event, and there is a lot of suspense over control of the Senate. According to the forecast market Polymarket-related contract price, the implicit probability of the Democratic Party regaining control of the Senate in the market is about 65%.

Investors have begun to plan ahead for a scenario where the Democratic Party may control one or both houses of Congress after the midterm elections. If the Democratic Party gains control, the long-term tug-of-war over the budget and delays in disbursement of funds may further intensify, and US defense stocks will face greater pressure. In terms of stock price performance, after two consecutive years of strong increases, US defense stocks faced bottlenecks this year. The iShares American Aerospace and Defense ETF has fallen by nearly 5% so far during the year, significantly outperforming the S&P 500 index, which rose 14% during the same period.