US Midterm Elections Become a "Touchstone" for Defense Stocks: Trillion-Dollar Defense Budget Expansion Faces Congress Test

According to Zhihu Finance APP, the U.S. midterm elections are becoming a key test of investors' sentiment toward the rapidly growing defense sector. Market observers note that U.S. President Trump is seeking to raise the defense budget by over 40% to about 1.5 trillion dollars, but whether this plan can be implemented depends largely on whether the Republican Party can retain control of Congress.

Sheila Kayaoglu, Managing Director of Equity Research at Jefferies Financial Group, said on Wednesday: “This is a significant risk.”

Despite rising political uncertainty, those bullish on the defense sector believe opportunities remain. Wars in Europe and the Middle East are depleting weapons stockpiles, and traditional defense contractors are struggling to replenish these stocks quickly, which is supporting demand for the relevant industries.

Ward McNally, founder and managing partner of Chicago private equity firm McNally Capital, stated: “This administration has always supported public-private cooperation, which is beneficial for all participants, whether early-stage tech companies or more mature businesses.”

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

Anita Antenucci, founder and managing partner of consulting and commercial banking firm 3Wire Partners, said: “From raw materials to metal components to defense electronics, these are all at the top of the watch list.”

Several recent polls show that in generic ballot tests for the congressional midterm elections, Democratic candidates’ support rate is significantly higher than that of Republicans. Prediction markets and institutional analysts generally believe Democrats are highly likely to retake the House of Representatives, while control of the Senate remains uncertain. Prices of related contracts on prediction market Polymarket indicate a market-implied probability of around 65% that Democrats will reclaim control of the Senate.

Investors have already begun positioning in advance for scenarios where Democrats may control one or both chambers of Congress after the midterm elections. If the Democrats gain control, prolonged budget wrangling and funding delays could intensify further, putting greater pressure on U.S. defense stocks. In terms of share price performance, after two consecutive years of robust gains, U.S. defense stocks have hit a bottleneck this year. The iShares U.S. Aerospace & Defense ETF is down nearly 5% year-to-date, sharply underperforming the S&P 500 index, which is up 14% over the same period.