NEW YORK - Investors are turning their focus to Tuesday’s US midterm elections, which will determine control of Congress and could spur moves in everything from energy companies to cannabis stocks.

Republicans have picked up momentum in polls and betting markets and analysts see a split government – with the GOP winning the House of Representatives and possibly the Senate – as the likely outcome possibly hindering Democratic President Joe Biden’s agenda.

Traders also appear to be leaning towards a Republican win: a basket of stocks and other assets tracked by advisory firm Strategas that would be expected to do well after a Republican victory have outperformed a counterpart Democrat portfolio, indicating a roughly 70 per cent chance that Republicans win both the House and Senate.

A split government could result in political gridlock that stymies major policy changes, an outcome that investors see as favourable for equities. Regardless of the winner, past midterm elections have ushered in a period of positive market performance, something investors would welcome after a year in which the S&P 500 has declined by nearly 21 per cent.

Divided government could also, however, pave the way for partisan stand-offs over raising the federal debt limit that could usher in worries of a US default.

Here are some areas of the stock market that will be in focus as Americans head to the polls:

Defence

Defence spending is expected to rise regardless of how Tuesday’s vote plays out, given geopolitical tensions such as the conflict in Ukraine. But a Republican sweep sets the stage for spending to rise “significantly”, according to UBS Global Wealth Management, versus “moderately” if Democrats retain one or both chambers of Congress.

The outcome puts a focus on shares of defence contractors, such as Lockheed Martin or Raytheon Technologies. The S&P 500 aerospace and defence index is up nearly 10 per cent this year.

Energy

Energy stocks have had a banner year, with the S&P 500 energy sector rising over 60 per cent so far in 2022, while the broader index has slumped around 21 per cent.

Policies to encourage more US energy production could result from Republican control of both the House and the Senate, Citi analysts said.

While such legislation could be favourable for oil exploration companies, it may weigh on the stocks by pressuring oil prices, Citi analysts wrote.

More direct benefits from favourable industry regulations could filter through to shares of pipeline companies, such as Williams Cos, Strategas said.

Clean energy

With Republicans gaining momentum, any downside for solar and other alternative energy stocks may already be baked in, but a surprise Democratic victory could power the sector higher. The Invesco Solar ETF is down about 6 per cent this year. Legislation favouring “clean energy”, including tax credits and investment, could see support if Democrats maintain control of Congress, according to State Street Global Advisors.

Healthcare

Pharmaceutical and biotech stocks may benefit in a Republican victory, after Democrats recently pushed through a law aimed at lowering prescription drug prices. Pharma and biotech stocks as a whole have moved in the opposite direction of betting odds favouring a Democratic sweep, according to Goldman Sachs analysts.

The S&P 500 healthcare sector is down some 7 per cent in 2022, while the S&P 500 pharmaceuticals index is up about 1 per cent.

Security

A Republican Congress would make border security a “top tier issue”, according to Strategas.

While private prisons such as CoreCivic and Geo Group face “a steady stream of negative headlines” during the Biden administration, “the remaining federal policy risks will largely dissipate in a divided government scenario”, BTIG said in a report.

CoreCivic is up about 12 per cent this year, while Geo Group is up about 15 per cent.

Cannabis

Cannabis stocks such as Canopy Growth tend to move on regulatory headlines, including prospects for legalisation efforts. Odds of friendlier cannabis legislation increase with a Democratic majority, according to Strategas.

The AdvisorShares Pure US Cannabis ETF is down over 55 per cent this year.

Big tech

It is unclear whether megacap tech company reform has bipartisan support, according to Citi analysts. Therefore Republican victory in the House or Senate “probably means a legislative standstill, implying an incremental positive for the category”, they said.

The tech-heavy Nasdaq 100 index has fallen by roughly one-third this year. REUTERS