3 in 3: Sifting Through the Noise of Midterm Elections

It's a week before the midterms, and the noise level is getting pretty intense. But the noise isn't just coming from the political ads. It's also flooding the market as investors are making assumptions about what different political scenarios could mean for stocks in general and for specific industries. And I'll tell you there are some interesting companies that are getting unfairly hit in all this chaos. I'm Jim Lydotes, and this is our midterms special edition of 3 Points in 3 Minutes. So let's flip over the timer and let's go. 

So there's three areas that we're watching: the US consumer, AI infrastructure, and aerospace and defense. 

First on the consumer, I think there's a very real possibility that we climb the wall of worry here, because the mood of consumer spending is pretty tough right now. Consumers are dealing with high prices, high borrowing costs, high energy costs, and many consumer stocks have taken a lot of pain.

But the companies closest to consumers are telling us that these people are much more resilient than the headlines suggest. The largest banks just reported third-quarter earnings. And we also recently met with the management team of Walmart, and all of these folks are telling us the same message, which is that the consumer is holding up just fine. Credit seems to be okay. Walmart is confident enough in the US consumer that they're starting to push through more pricing. 

And that's important because you need to stay prudent, but you also need to follow the data. So if we get any type of relief on inflation or borrowing costs, there's the potential for a pretty meaningful snack back in consumer stocks. 

Second, AI infrastructure. This is where the debate has changed. 

Investors aren't questioning AI demand as much as they're questioning who pays for this massive buildout and at what cost. Take a look at Coreweave. This is the company that rents out big clusters of GPUs, and their customers are AI companies. Last week, its stock fell more than 15% in a single day. And the yields on what investors required to hold its bonds soared to nearly 15%. 

Investors got spooked about how all of this AI infrastructure is going to get financed. But don't confuse financing risk with a lack of demand. Core Weave reported a revenue backlog of about $104 billion just at the end of June. So the AI demand story hasn't broken down. The market is just working through questions about who pays for it. So we think the volatility can create opportunities in the companies that are supplying the infrastructure behind AI. 

Third, aerospace and defense. There are a few sectors at the epicenter of election noise, as much as defense stocks, but I think the markets are missing a much bigger story right now. 

The Pentagon is learning a lot from the wars in Ukraine and Iran, and it's changing what it wants to buy. So last week, Pentagon officials talked about moving to a very different cost model with ambitions to move from thousands of semi-autonomous weapons towards hundreds of thousands and eventually potentially millions. This is money proposed. It hasn't been fully approved, but that's a very different defense model. It's not just a small number of incredibly expensive jets and missiles, but potentially huge numbers of cheaper systems that are produced at scale. So that could change who the winners and losers are across the entire defense industry. And while the market worries about the election, we're asking a different question, which is who benefits if what the Pentagon buys is fundamentally changing? So when election uncertainty pressures companies where the fundamental demand picture hasn't changed, that's an area we want to spend some time on. And that brings us all back to where we started. Will there be volatility into November 3rd? Absolutely. Will there be volatility after November 3rd? You can absolutely bet on it. 

But you're not investing for election day. Your goals are probably further down the road, which is why you own stocks in the first place. So if you think back to all the elections over the past 30 years, where ultimately half the country was disappointed, all the global conflicts, the global financial crisis, the worst pandem pandemic in a century. But throughout all that, the S&P has returned over 10% per year for the last 30 years.* So we're positioning portfolios for what could actually move the needle, not just what's making the headlines over the next couple of weeks. 

That's our three points in three minutes, and we probably went a little bit over the three minutes this time. But everyone get out there and vote and we'll see you back here next time. 

* S&P 500 30-year annualized return as of 09/30/26, Bloomberg. 

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