The Midterms Are Tomorrow. Here's What History Says Defense Stocks Do in the 6 Months After a Midterm -- and the 2 I'd Buy First

Midterm Election Day is tomorrow, and, as elections often do, the 2026 midterm is prompting plenty of speculation about potential effects on stocks. That scenario is heightened because if polls and prediction markets prove accurate, the Democrats are heading to a Congressional sweep, meaning that come January 2027, they'll control the House and the Senate.

Alone, that's not cause for alarm. After all, history confirms that stocks often perform well under divided governments, and the third year of the presidential cycle, that'd be 2027, is often the best for the S&P 500.

Defense stocks may fall after Election Day, but they could bounce back sooner than some investors think. Image source: Getty Images

Still, investors often fret about sector- and industry-level implications following shifts in congressional majorities. Of late, the aerospace and defense industry has been an epicenter of those worries. Amid increasing talk of a "blue wave," the iShares U.S. Aerospace & Defense ETF (NYSEMKT: ITA), one of the largest exchange-traded funds (ETFs) tracking the industry, resides 18.4% below its 52-week high.

On the other hand, the history of defense stocks under Democrat-controlled Congresses isn't as dire as the industry's recent price action suggests. Navigating the expected 2027 political landscape, however, requires selective focus on defense equities. Hence, GE Aerospace (NYSE: GE) and RTX (NYSE: RTX) are two of the top names to consider.

History, selectivity matter

Investors anticipating a blue wave/Democrat sweep on Tuesday have some recent history to lean on regarding the post-election outlook for defense stocks. Democrats held a trifecta -- House, Senate, and the presidency -- from Inauguration Day 2021 through the end of 2022. Over that time, the iShares U.S. Aerospace & Defense ETF gained 22.1%, handily outpacing the broader market. In fact, that run-up include impressive performance six months after Election Day.

Following the 2018 midterms in which Democrats gained control of the house, defense stocks and the broader pulled back, but by the end of May 2019, both the bellwether ETF and the S&P 500 posted gains.

ITA Total Return Level data by YCharts

Because as soon as the 2026 midterms wrap up, attention will turn to the 2028 presidential contest, neither party will want to be seen as taking an axe to defense spending. Not with the wars in Iran and Ukraine raging on. Prevailing wisdom indicates that if Democrats control both chambers of Congress, they may seek to delay or roll back spending on specific defense programs, such as the Golden Dome or certain fighter jets or tanks.

That implies potential vulnerability for shares of program-specific defense contractors, and the market is already reflecting as much. In part because of significant commercial aerospace exposure, GE Aerospace and RTX have some buffering against a possible Congressional move to rein in spending on select military products and programs.

RTX engines are found in 13,000 commercial aircraft worldwide, and the company is a leader in private business jet engines. Regarding GE Aerospace, if Boeing's recent production update proves accurate, the commercial aircraft aftermarket is expected to be robust in 2027, providing a compelling runway for the stock that isn't dependent on defense spending.

The replenishment angle

History can be instructive, but regardless of industry, market participants shouldn't be emotional about election results. Yes, that can be difficult, but one of the biggest mistakes some investors make is selling stocks based on election results.

That advice applies to defense stocks even if congressional majorities change hands. Several large defense contractors, including RTX, are sitting on massive order backlogs, some of which are at all-time highs.

In a political context, that's pertinent to investors mulling RTX in the near term, because significant portions of the defense industry's backlogs aren't tied to new programs. Rather, those orders pertain to the three "R's" of readiness, rearmament, and replenishment, which are front and center due to the war in Iran. Remembering that, in the U.S., it often feels as though it's an election year even when it's not, it must be acknowledged that the three R's are examples of rare bipartisanship. So the knee-jerk reactions to a blue wave may be creating buying opportunities in defense stocks.

Todd Shriber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Boeing, GE Aerospace, and RTX. The Motley Fool has a disclosure policy.