Why AI and Defense Stocks Carry the Most Risk Before the 2026 Midterms
The reason connects to something useful for any investor. A company's exposure to an election depends on how much of its future profit runs through decisions Congress makes. AI and defense run through Congress more than almost any other part of the market, so a change in who controls the House or its committees can change the assumptions their share prices are built on. If you own an S&P 500 index fund, US tech, or Canadian stocks that trade on American sentiment, you hold more of this risk than the label on the fund suggests.
Prices built on future rules move when the rule-makers might change
Defense is the plainer case. The House holds the power of the purse, meaning every budget dollar has to pass there. Both parties generally back a strong military, but they split on where the money goes: aid for foreign conflicts versus upgrades to domestic hardware, for example. Contractors are valued on years of expected orders, and committee chairs shape those orders. A new majority can shift billions between programs without cutting the total.
AI carries two kinds of exposure. One is regulation. Proposals on data privacy, copyright and election integrity have support from both parties, and any of them could raise costs for the companies building and selling AI models. The other is money. The CHIPS and Science Act committed billions in subsidies to domestic chip production, and its oversight could change depending on who wins. Both parties favour bringing chip manufacturing home, yet they disagree on how much public money it should take.
Add the deficit, which reached roughly $1.8 trillion in 2024. That puts every discretionary line, defense and tech subsidies included, under a sharper pencil no matter which party gains.
The question to ask of any holding is simple: how much of this company's story depends on a vote that hasn't happened yet?
Concentration turns one sector's problem into yours
Since 2023, a small group of mega-cap tech companies, often called the Magnificent Seven, has delivered a disproportionate share of the S&P 500's gains. When so few names drive an index, a sell-off in one theme drags the whole fund. Diversified on paper can still mean heavily tilted toward AI in practice.
Here in Alberta that tilt travels. When US tech drops, appetite for risk on the TSX tends to drop with it, hitting Canadian tech and energy. And Washington is already weighing on this province through trade: the CUSMA joint review came due on July 1, 2026, and in August the US imposed 50% tariffs on certain Canadian imports.
Sort the businesses by what actually backs them
Political risk falls unevenly inside a sector. Companies building data centres and the power supply behind them sell something physical with real demand. Firms trading on an AI theme with little revenue have only the narrative, and a narrative reprices quickly. Cybersecurity and competing with overseas manufacturing also enjoy rare support from both parties, which gives those companies some protection from sharp swings in policy.
Defense has its own cushion. When conflicts flare abroad, these stocks often hold up as a hedge regardless of what's happening in American politics.
The history offers some perspective too. The S&P 500 has tended to lag in the year before a midterm and often rallies once results settle and uncertainty fades. Divided government usually brings gridlock, which means fewer sweeping new rules, and markets sometimes welcome that. Over the long run, US stocks have trended upward under both parties, and the Federal Reserve's rate decisions often move valuations more than campaign speeches do.
So before November 3, go through your holdings and mark which ones would need Congress to cooperate for their price to make sense. That list is where your election risk actually sits.
The reason connects to something useful for any investor. A company's exposure to an election depends on how much of its future profit runs through decisions Congress makes. AI and defense run through Congress more than almost any other part of the market, so a change in who controls the House or its committees can change the assumptions their share prices are built on. If you own an S&P 500 index fund, US tech, or Canadian stocks that trade on American sentiment, you hold more of this risk than the label on the fund suggests.
Prices built on future rules move when the rule-makers might change
Defense is the plainer case. The House holds the power of the purse, meaning every budget dollar has to pass there. Both parties generally back a strong military, but they split on where the money goes: aid for foreign conflicts versus upgrades to domestic hardware, for example. Contractors are valued on years of expected orders, and committee chairs shape those orders. A new majority can shift billions between programs without cutting the total.
AI carries two kinds of exposure. One is regulation. Proposals on data privacy, copyright and election integrity have support from both parties, and any of them could raise costs for the companies building and selling AI models. The other is money. The CHIPS and Science Act committed billions in subsidies to domestic chip production, and its oversight could change depending on who wins. Both parties favour bringing chip manufacturing home, yet they disagree on how much public money it should take.
Add the deficit, which reached roughly $1.8 trillion in 2024. That puts every discretionary line, defense and tech subsidies included, under a sharper pencil no matter which party gains.
The question to ask of any holding is simple: how much of this company's story depends on a vote that hasn't happened yet?
Concentration turns one sector's problem into yours
Since 2023, a small group of mega-cap tech companies, often called the Magnificent Seven, has delivered a disproportionate share of the S&P 500's gains. When so few names drive an index, a sell-off in one theme drags the whole fund. Diversified on paper can still mean heavily tilted toward AI in practice.
Here in Alberta that tilt travels. When US tech drops, appetite for risk on the TSX tends to drop with it, hitting Canadian tech and energy. And Washington is already weighing on this province through trade: the CUSMA joint review came due on July 1, 2026, and in August the US imposed 50% tariffs on certain Canadian imports.
Sort the businesses by what actually backs them
Political risk falls unevenly inside a sector. Companies building data centres and the power supply behind them sell something physical with real demand. Firms trading on an AI theme with little revenue have only the narrative, and a narrative reprices quickly. Cybersecurity and competing with overseas manufacturing also enjoy rare support from both parties, which gives those companies some protection from sharp swings in policy.
Defense has its own cushion. When conflicts flare abroad, these stocks often hold up as a hedge regardless of what's happening in American politics.
The history offers some perspective too. The S&P 500 has tended to lag in the year before a midterm and often rallies once results settle and uncertainty fades. Divided government usually brings gridlock, which means fewer sweeping new rules, and markets sometimes welcome that. Over the long run, US stocks have trended upward under both parties, and the Federal Reserve's rate decisions often move valuations more than campaign speeches do.
So before November 3, go through your holdings and mark which ones would need Congress to cooperate for their price to make sense. That list is where your election risk actually sits.
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