Traders work on the floor of the New York Stock Exchange (NYSE) in New York, U.S., on Monday, Jan. 22, 2018. Stocks edged higher as investors look toward a busy week of earnings. The dollar weakened and Treasuries halted a recent selloff as the U.S. government’s partial shutdown dragged into a third day. (Photographer: Michael Nagle/Bloomberg)

Stock Investors Are Watching These Six Sectors Ahead of Midterms

(Bloomberg) -- Equity investors have homed in on six key sectors ahead of Tuesday’s midterm elections, and pharma and bank stocks look best positioned amid expectations for a divided Congress.

Pharmaceutical and biotechnology stocks may gain if the expected stalemate takes the threat of drug pricing restrictions off the table, according to analysts. On the other hand, industrials may continue to languish under a divided government as a major spending package would be unlikely. Technology and internet stocks are likely to face more regulatory scrutiny no matter who’s in power. The opposite is true for banks, which will probably benefit from looser rules regardless, as President Donald Trump’s regulators are firmly in place.

Energy stock investors are more focused on local outcomes, including a statewide drilling referendum in Colorado and a push for renewables in Arizona. The jury is still out for cannabis stocks with marijuana legalization on the ballot in four states, including recreational pot use in North Dakota and Michigan. Meanwhile, policy watchers are skeptical there will be a shift toward China on trade no matter what happens in Congress. Outside the U.S., emerging markets could see gains if the vote goes as expected.

To be sure, some market watchers say not much will change in any outcome and it’s mostly just about playing defense.

Greg Valliere, chief global strategist at Horizon Investments LLC, said the election may have “only a modest impact on investors” who have bigger macro worries, including rising interest rates. And CIBC’s head of portfolio strategy Ian de Verteui writes that “history suggests equities do fine post-midterms” even when they often result in the president’s party losing seats.

Here’s what Wall Street is saying about key industries to watch:

DRUGMAKERS

Investors may pile back into pharmaceutical and biotechnology stocks if midterm U.S. elections result in the expected stalemate between two major parties at odds on how to tackle escalating drug prices. Gridlock in Congress for at least the next two years would lessen the risk of disruptive, government-dictated pricing changes, according to analysts.

BANKS

Analysts expect some near-term pressure on bank stocks but say it won’t be all bad news. Most market watchers anticipate Trump’s efforts to ease bank rules will continue, as his regulators are firmly in place. Veda Partners’ Henrietta Treyz said the very passing of the election itself will eliminate uncertainty and could help shares rise.

TECHNOLOGY

Internet companies, which are already struggling amid signs of cooling after years of rapid growth, have emerged as a rare subject of bipartisan criticism. “Tech is taking its place at or near the top of the agenda. Previously, it wasn’t even on the agenda,” said Ed Mills, a Washington policy analyst at Raymond James. Isaac Boltansky, senior policy analyst at Compass Point, suggested additional hearings are more likely than regulatory changes.

INDUSTRIALS

Goldman analysts and economists believe a major spending package is unlikely, even as infrastructure stays a key focus in the legislative debate. They see only a 25 percent chance of an infrastructure spending bill if Republicans maintain control of both houses of Congress, due to financing difficulties, and “if Democrats take control of one or both chambers, our economists believe a major spending compromise is even less likely.”

Read More: Industrials May Continue to Languish Under a Divided Government

ENERGY

The midterms are seen having a “low” impact on the energy sector, according to UBS. “Barring a change in Republican support for the Iran sanctions -- which have driven oil prices higher -- Congress is unlikely to impact the sector,” UBS said.

Read More: Energy Stocks Snub National Midterm Elections in Favor of Local

CANNABIS

If the Democrats take the House and Attorney General Jeff Sessions departs, U.S.-focused pot stocks are likely to see a short-term surge, analysts say. Clarity on banking rules could help close the valuation gap between the U.S. stocks and their Canadian counterparts. At the state level, pot legalization is on the ballot in North Dakota and Michigan, while voters in Missouri and Utah will weigh in on medical marijuana proposals.

For more election coverage, see Bloomberg’s ELECT special report, or our TOPLive blog for real-time analysis of results starting from 6 p.m. ET Tuesday.

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