Stocks and markets to watch as Donald Trump approaches his midterm test

Donald Trump has never been shy about treating the stock market as a personal scorecard. In a recent Pennsylvania speech, he declared that ‘the only thing that's really going up, big, it's called the stock market, and your 401(k).’

It’s a claim with some grounding in recent history: major US indices delivered double-digit returns in each of the three years from 2023 to 2025. And in his latest prediction, Trump argued that the Dow Jones Industrial Average, having just surpassed 50,000 points, will reach 100,000 by the end of his presidency.

This may be excessive, and those boasting rights now carry political and financial risk in equal measure.

The November 2026 midterm elections are rapidly approaching, and the economic landscape Trump has engineered — one of sweeping tariffs, aggressive deregulation, a historic spending push and a running battle with the Federal Reserve — has created a market environment that is seriously volatile and difficult to navigate.

And there are now three key macro events to keep an eye on.

First, Kevin Warsh's arrival as Federal Reserve Chair in May. Markets will scrutinise whether the new Chair acts independently of the White House, which has been explicit in demanding ‘the lowest rates in the world.’ The 10-year Treasury yield is the real-time barometer of that perceived independence. Any signal that the Fed is losing autonomy will likely increase the risk premium on US assets.

Second, the Supreme Court is expected to rule on the legality of Trump's use of emergency powers to implement tariffs. A ruling against the administration could produce a short-term market rally, though Morgan Stanley notes the administration would likely find alternative legal mechanisms to impose trade restrictions regardless of the outcome.

Third, the renegotiation of USMCA (the North American trade agreement) expected this summer will determine how tightly North America aligns against China. Tighter rules of origin and closer continental supply chains could accelerate reshoring trends.

Together, these disparate components will have some influence on many market segments.

Historical warning

Before turning to individual sectors, the statistical backdrop deserves some attention.

Midterm elections create uncertainty.

The political party in power typically loses seats in Congress, leaving investors anxious about future fiscal, trade and regulatory direction. Add to that a market already trading at 22 times forward earnings (a significant premium to the 10 year average of 18.8 times) and the risk profile may be sharpening considerably.

The S&P 500 has only sustained such expensive valuations twice before in modern history: during the dot-com bubble and the pandemic era. That could feel like uncomfortable territory.

The economy itself offers a mixed picture. The US added just 181,000 jobs in 2025, a sharp fall from 1.2 million in 2024 and the weakest showing since the pandemic. Trump's tariffs, which have raised the average tax on US imports roughly fivefold, combined with AI efficiencies, have driven policy uncertainty that has already prompted businesses to cut hiring.

The PCE price index, the Federal Reserve's preferred inflation measure, has edged toward 3%, comfortably above the 2% target it has missed for four and a half years. Yet Wall Street remains broadly optimistic: the median year-end forecast from 20 major investment banks points to around 10% upside for the S&P 500 in the remaining months of the year.

Rotation into small caps?

Perhaps the most significant market development of early 2026 is what analysts on trading floors have taken to calling the ‘Great Rotation.’ As of mid-February, the Russell 2000 index. which tracks small cap, predominantly domestic US companies, has staged a dramatic outperformance against large cap benchmarks. The index is up by more than 8% in the first two weeks of February alone, while the tech-heavy S&P 500 and Nasdaq have traded sideways or dipped.

The catalyst could be the convergence of several policy developments under what markets are calling Trump Trade 2.0. The One Big Beautiful Bill Act (OBBBA), signed into law last July, made the 2017 tax cuts permanent and introduced 100% bonus depreciation and immediate R&D expensing from January 2026.

It also established the Office of Budget, Balance, and Bureaucratic Accountability (OBBBA) to accelerate deregulation across federal agencies. Simultaneously, the Fair Trade Act has granted the executive branch permanent tariff authority, effectively ending the era of temporary trade skirmishes and replacing it with a structurally higher tariff economy. For reference, the effective tariff rate has risen from roughly 3% in 2024 to an estimated 18% today.

The winners of this new paradigm seem to be domestically focused companies with limited exposure to global supply chains. The losers are the mega-cap multinationals whose earnings depend on cross-border trade and whose share prices seem to have already priced in success. For the Russell 2000 versus the S&P 500, this represents the longest sustained period of small-cap outperformance since 1996.

Investors watching for opportunities here often focus on quality: companies with manageable debt, pricing power and exposure to sectors actively deregulated by the administration.

Defence spending

The defence sector was already enjoying momentum from 2025, which has accelerated in 2026. Lockheed Martin and Northrop Grumman, the sector's traditional market leaders, have both gained.

The political logic is simple: Trump has proposed a staggering $1.5 trillion in security spending for the coming year, and the Department of Defence (rebranded the Department of War by the administration) is operating on a record $900 billion budget in fiscal 2026.

And Lockheed, the world's largest defence contractor, derives more than 70% of its revenues from the US government.

But caution is warranted. Kratos Defense and Palantir — both significant beneficiaries of the defence spending narrative — trade at well over 100 times forward earnings. Major players including RTX and Lockheed have already shown signs of being overbought on technical measures.

An end to the conflict in Ukraine, however uncertain that looks, would also represent a meaningful downside risk for the entire sector.

Banking on uncertainty

The financial sector presents a more complex picture. On one hand, the administration's deregulatory agenda is a genuine tailwind. The OBBBA has accelerated the unwinding of post-2008 compliance requirements, and a steepening yield curve, driven by the nomination of Kevin Warsh to succeed Jerome Powell as Fed Chair in May, is widening net interest margins for lenders.

Regional banks may be well placed, with smaller banks including KeyCorp and Huntington Bancshares highlighted by some analysts as standout beneficiaries of a surge in loan demand from domestic manufacturing projects.

On the other hand, Trump has floated the idea of a temporary cap on credit card interest rates at 10%. The proposal, aimed at reducing consumer cost burdens ahead of the midterms, where affordability has become the central campaign issue, would likely force lenders to tighten credit standards and shift revenue toward fees.

While this may never happen, it remains a key risk for financial stocks in 2026. The administration may pivot against them just as readily as it supports them, depending on what the political weather demands.

Healthcare data

Research from various institutions indicates that healthcare is often the best-performing sector historically in midterm election years, and there are specific reasons to think that pattern could hold in 2026.

The expiration of Affordable Care Act subsidies caused insurance premiums to spike sharply for millions of Americans, but reinstatement of those subsidies remains politically possible before November, a move that would benefit insurers operating on ACA exchanges.

Greater policy clarity combined with an improving macro backdrop is also expected to support insurance and biotech companies. And on a broader scale, lower interest rates and looser regulations could fuel mergers and acquisitions in the sector.

The OBBBA tax provisions offer additional upside for biotech and medtech firms, which can now claim R&D tax benefits more aggressively. AI's growing impact on drug discovery and therapeutic innovation is another long-term driver that has yet to be fully priced into healthcare valuations, which remain relatively discounted compared to the broader market.

American energy

Energy has been a natural beneficiary of the Trump agenda, and the administration's rescission of emissions mandates and prioritisation of domestic production have delivered results for the sector's biggest names. For instance, Exxon Mobil Corp and Chevron both reported strong earnings in late January.

Midstream energy (the pipelines and distribution infrastructure that moves oil and gas) is seen by several major asset managers as strong portfolio components for 2026 and beyond, offering durable demand growth and attractive income characteristics.

But the sector is not without its complications. Trump's actions over Venezuela, where the administration ousted Nicolás Maduro in early 2026 and sought to redirect Venezuelan oil production toward US buyers, initially spiked crude prices before they gave back their gains.

Venezuela plays a relatively small role in global oil supply, limiting the long-term impact on prices. For energy investors, the bigger risk is an administration that talks up oil even as it simultaneously tries to reduce consumer energy costs, a political contradiction that could suppress the prices on which sector profitability depends.

Uranium and nuclear power represent the sector's most interesting growth story. Cameco, the Canadian uranium miner and in some ways the only large-cap US-listed vehicle offering full nuclear supply chain exposure, has attracted strong attention.

Nuclear power's renewed allure is driven significantly by the insatiable energy demands of AI data centres. One of the bottlenecks to AI expansion is the sheer volume of electricity it requires, and nuclear offers the combination of baseload reliability and zero-carbon credentials that natural gas cannot hope to match.

Critical minerals

The tariff regime combined with Chinese export controls on graphite, tungsten, antimony and some rare earths, has seen the Trump administration push for domestic supply chain resilience for the materials that underpin everything from EV batteries to fighter jet components.

The most recent headline-grabbing development is Project Vault: a public-private partnership funded by a $10 billion loan from the US Export-Import Bank and nearly $2 billion in private sector capital, designed to create a physical strategic reserve of critical minerals for civilian use, protecting industry from supply disruptions and price volatility. The model is explicitly modelled on the Strategic Petroleum Reserve.

The stockpile is intended to cover all 60 minerals on the USGS Critical Minerals List, with particular emphasis on the 17 rare earth elements, cobalt, copper, germanium, scandium and gallium; in other words, categories where China dominates processing streams. Major OEM participants already signed up include GM, Boeing, GE Vernova and Clarios, with commodities houses Hartree Partners, Mercuria and Traxys handling procurement.

Alongside Project Vault, the administration announced the Forum on Resource Geostrategic Engagement (FORGE) and signed 11 new bilateral critical minerals frameworks with countries including Argentina, Morocco, Peru, the Philippines and the UAE, part of a broader effort to build a non-Chinese supply architecture before the USMCA renegotiation this summer potentially locks in continental trade rules.

The legislative foundation underpinning all of this is the OBBBA, which allocated $350 billion in Department of Energy financing for mines and related projects in fiscal year 2026.

Separately, the Commerce Department's Section 232 national security investigation, covering every mineral on the USGS critical minerals list plus uranium, found that mineral imports threaten US national security, citing price volatility as a major barrier to developing alternative supply chains.

AI bubble?

The technology sector's story in 2026 is one of differentiation. The AI infrastructure buildout remains real and well-funded: data storage firms like SanDisk have surged in 2026 thus far, and the investment thesis for semiconductor demand remains intact. But the era of blanket mega-cap tech outperformance appears, at least temporarily, to be over. And valuations remain arguably at the extreme end.

Apple has warned that global memory shortages and trade frictions could hit margins. The broader concern for tech multinationals is the structural tariff environment: companies with global supply chains are now operating in a fundamentally more expensive world.

Analysts at Charles Schwab recommend a ‘barbell’ approach: pairing continued exposure to technology and AI names with high-quality value stocks that offer better protection in a volatile market. The logic is sound. If the AI thesis continues to play out, the technology weighting provides upside.

If tariffs or a broader slowdown dents sentiment, quality value names cushion the blow.

Precious metals run

If the Trump era has one unambiguous market winner, it is gold. The yellow metal gained more than 64% in 2025, setting more than 50 record highs and now stands above $5,000 per ounce, as tariff uncertainty, a weakening dollar, sticky inflation and aggressive central bank buying created near-perfect conditions.

Going into 2026, the question is no longer whether the bull market is real, but how far it has left to run. J.P. Morgan raised its year-end target to $6,300 per ounce in February, with Deutsche Bank and Société Générale both at $6,000. The directional consensus is unusually firm: central banks are expected to purchase around 850 tonnes this year, only marginally below 2025's record, and ETF inflows show no sign of slowing.

Three structural forces explain gold's endurance: de-dollarisation, as central banks worldwide diversify away from US Treasuries whose safe-haven status has been eroded by record deficits and questions about Fed independence; the debasement trade, as tariff-driven inflation and a dollar that weakened more than 10% from its January 2025 high bolster gold's purchasing-power appeal; and ETF momentum, which reached record assets under management last year.

Silver's case is arguably more dynamic. The metal surged roughly 150% in 2025, driven by both safe-haven demand and genuine industrial need. Silver is a critical input in solar panels, EV charging infrastructure, and semiconductors, sectors with structural policy-driven tailwinds.

Despite its dramatic run, analysts note it still trades well below its inflation-adjusted historical highs relative to gold, suggesting further upside. Mining equities such as Barrick Gold, Wheaton Precious Metals and First Majestic Silver offer exposure for those who prefer not to hold the physical metal directly, though investors should be aware of silver's higher volatility.

Bonds learning curve?

The bond market in 2026 rewards precision rather than broad conviction. The Fed is broadly expected to deliver two to three further rate cuts, bringing the federal funds rate toward 3.0%–3.5% by year end, and Charles Schwab notes that a steepening yield curve, positive real interest rates, and easing central bank policy together create ‘a good backdrop for bond investors.’

But long-duration Treasuries are a different matter entirely. The Congressional Budget Office estimates the OBBBA could add $3.4 trillion to the federal debt by 2034, and the resulting surge in Treasury issuance is applying persistent upward pressure to long-term yields.

The practical conclusion may be to to favour the intermediate segment of the curve (two to five year maturities) where investors can capture attractive yields without excessive exposure to fiscal-driven long-end pressure.

The overriding risk for the entire bond market is Fed credibility. If Kevin Warsh is seen to be cutting rates below what economic data justifies, accommodating the Trump administration, long-term Treasury yields could spike even as short rates fall, delivering a painful bear steepening for holders of government debt.

That same scenario would, of course, be positive for gold, which is precisely why the two asset classes, in 2026, are often considered to be two sides of the same macro coin.

How to position

While past performance is no guarantee of future results, and this article does not constitute any form of advice, the overarching investment theme for 2026 may well be selectivity.

The era of buying an S&P 500 index fund and watching it compound effortlessly is not over, but the risk-reward ratio of that approach may have shifted. Sector diversification, a tilt toward domestic earnings, quality balance sheets, and the willingness to hold through what history says will be a significant drawdown at some point this year could be the hallmarks of a well-positioned 2026 portfolio.

The midterm elections are not simply a political event. They are a market event. And the evidence suggests that the turbulence, as much as the opportunity, is still ahead of us.