If the Democratic Party takes back Congress, it will initiate congressional hearings and investigations, severely damaging the stock prices and brands of related companies.

Written by: Dong Jing, Wall Street Insights

In the past year, investors who followed the Trump administration's investment in publicly listed companies have reaped substantial profits.

However, as the midterm elections approach and the Democratic Party is expected to regain control of at least one chamber of Congress, this stock price feast driven by government backing is facing multiple risks—lawsuits, congressional hearings, and political backlash, any of which could reverse the upward trend of related stocks.

On August 29, according to Bloomberg, polls indicate that the Democratic Party's chances of winning have risen, and market strategists warn that once the Democrats control the Senate or House, congressional investigations targeting government-held companies will follow, impacting both corporate brands and stock prices. Meanwhile, a shareholder lawsuit is challenging the legality of the government’s stake in Intel in court—if the court rules that the CHIPS Act does not grant the Commerce Department the authority to exchange equity for subsidies, the legal foundation for the entire government equity portfolio would be shaken.

Market strategists note that the gains in these stocks mostly come from a brief surge after the announcement, followed by a significant decline, indicating that the price momentum brought by government backing is inherently fragile. Henrietta Treyz, co-founder of research firm Veda Partners, frankly states that the Democratic-led committee summoning corporate executives and government officials to attend hearings is "one of the risks investors should focus on right now."

Government Investment Wave: Impressive Gains, but Mostly Short-lived

The Trump administration has implemented an unprecedented strategy: exchanging government funds for equity in publicly listed companies, directly injecting state capital into private enterprises. This practice quickly ignited market enthusiasm, with retail and institutional investors competing to bet on the next "government-chosen" target.

The figures look quite impressive. Intel's stock price has increased by over 300% since reports emerged last year about the Trump administration negotiating a stake; MP Materials has risen by 87% since the Department of Defense invested $400 million last July; Trilogy Metals has increased by 73% since the U.S. government agreed to acquire a 10% stake last October.

However, the structure of these gains deserves caution. Trilogy Metals' stock surged from $2.09 to a peak of $10.60 in a few days following the announcement of the deal, but then quickly fell back, currently at $3.62. MP Materials soared over 150% in the first five weeks after the government investment, but has since accumulated a nearly 27% decline over the year. Intel saw its peak after Trump announced in June that Apple would collaborate with it to design and produce semiconductors, and has since dropped 37%, making it one of the worst-performing stocks in the S&P 500 during the same period.

Aniket Shah, Global Head of Washington, Sustainable Development, and Transformation Strategy at Jefferies, attributes this surge to a specific logic: "You now have a government customer and spokesperson, and the market believes it will help your company succeed." However, the sustainability of this logic is facing increasing scrutiny.

Election Risks: If the Democrats Turn the Tables, Hearing Rooms Will Become a New Battleground

The midterm elections pose the most direct political risk looming over these stocks. Polls show the Democratic Party is likely to secure a majority in at least one chamber of Congress, and once they gain control of committee chair positions, the investigation machinery will be set in motion.

Democratic Senator Elizabeth Warren has taken the lead. She wrote to Commerce Secretary Howard Lutnick, questioning the legality of the government's stake in Intel. If the Democrats win the Senate, Warren will serve as chair of the Senate Banking Committee, where she will have the legal authority to summon witnesses and request documents.

Henrietta Treyz states that the Democratic Party "will seek every opportunity to attack the president for as long as possible." She anticipates that Democratic-led committees will summon corporate executives and government officials to testify on Capitol Hill, "which poses risks to corporate brands and stock prices, making it one of the most crucial concerns for investors right now."

This kind of political pressure is not without precedent. In 2009, both the Bush and Obama administrations faced heavy criticism from Republicans over government involvement in General Motors, which gave rise to the Tea Party movement. The difference now is that the government intervened to rescue a company on the brink of bankruptcy, whereas today the Trump administration is actively "choosing winners"—this shift in logic could lead to a different nature and intensity of political backlash.

Legal Risks: If the Lawsuit Prevails, the Entire Equity Portfolio May Be Affected

Compared to election risks, legal risks may be even more profound. Currently, a shareholder lawsuit is challenging the legality of the government's stake in Intel, and its outcome could have a chain effect on the entire government equity portfolio.

The lawsuit claims that the CHIPS Act did not authorize the government to make equity a precondition for issuing subsidies and accuses the Intel board of violating fiduciary duties, characterizing the deal as "extortion-like" seizure. Lutnick has applied to the court to dismiss the lawsuit, stating that the related arrangements are authorized under federal law and are vital to the U.S. defense industrial base; Intel's CEO Lip-Bu Tan and other board members have also moved to dismiss.

Josh Lipsky, senior director at the Atlantic Council's GeoEconomics Center, warns:

"If the court ultimately rules that the CHIPS Act does not grant the Commerce Department the authority over what has been done with Intel, this will have broad implications for many such deals."

Ann Lipton, a law professor at the University of Colorado, further points out that such a ruling would also call into question the Commerce Department's equity investments using CHIPS Act funds in other companies, including IBM and GlobalFoundries.

Mark Malek, Chief Investment Officer at Siebert Financial, admits the market's dilemma. His company holds Intel stock, and he states:

"It is the government's investment that has truly changed the game and maintained stock prices. If this factor disappears, what will happen next? That is why we haven't increased our holdings."

Structural Hazards: Politically Driven Stock Price Momentum Will Ultimately Return to Fundamentals

Above all risks, there is a more fundamental issue: when the logic for stock price increases is political rather than based on fundamentals, this momentum is inherently fragile.

Gina Martin Adams, chief market strategist at HB Wealth Management, notes that the risk of government "backing" always exists.

"It may positively affect stock prices, but this could partly be a result of investors chasing political trends, making stock price momentum rather fragile."

Matt Gertken, head of geopolitical and U.S. political analysis at BCA Research, characterizes the current situation as an "interventionist path" that has not yet been fully tested and digested within the U.S. system. "This process will have ups and downs," he says.

From a broader perspective, the Trump administration's strategy has overturned the traditional logic of government intervention in private enterprises—previously it was bailout, now it is support.

This shift has created significant stock price increases in the short term but has also buried the risks of overlapping political, legal, and market uncertainties. Analysts argue that as the countdown to the midterm elections continues, investors are reevaluating how far this government-backed transaction can really go.