Midterm Results Favor Defensive Stocks, Defense Bargains and Gold

The post-midterm market favors defensive sectors, selective defense stocks and a steady gold allocation as political gridlock and local resistance to AI infrastructure reshape leadership.

• The S&P 500 had gained about 9.3% through October 2026, while midterm-year returns have averaged 3.8% since 1944 and average drawdowns have reached 18%; the fourth quarter was positive in 21 of the last 23 midterm cycles, with a 7% average gain.
• A Republican president facing a Democratic Congress has produced a 4.8% average annual S&P 500 price gain since 1950, although the median result was a 6.2% gain after excluding the exceptional damage associated with 1973-1974 and 2008.
• The third presidential year has produced positive market returns in 17 of 19 cases since 1950, averaging 17.3%; under the same political configuration, all seven observed third years recorded gains averaging 16.1%.
• In the five comparable years from 1990-1992 and 2007-2008, consumer staples gained an average 9.6% and healthcare 5.4%, while financials lost 7.7%; healthcare and staples had already risen about 21% and 18% in 2026.
• Data-center restrictions passed in 33 of 45 ballot measures across 10 states, with all 20 Ohio measures supporting restrictions; the Magnificent Seven were expected to grow third-quarter earnings by 22.6%, versus 32.6% for the other 493 S&P 500 companies.
• Defense spending rose from $900 billion in fiscal 2024 to $1 trillion in fiscal 2026, while the White House seeks $1.5 trillion for 2027; Lockheed Martin fell 6.5% and L3Harris nearly 8% after the election, even though the S&P 500 Aerospace & Defense Index gained 30.2% in 2007.

Takeaway: Investors should rebalance rather than chase sectors that already rallied, treat defense weakness as selective opportunity, diversify away from concentrated mega-cap technology exposure and maintain the author's recommended 10% gold allocation, split between bullion and high-quality miners.