After the election, will the "Trump deal" backfire?

Author: Wall Street Journal

In the past year, investors who followed the Trump administration's investment in publicly listed companies have reaped substantial rewards. However, as the midterm elections approach and the Democratic Party is poised to regain control of at least one chamber of Congress, this stock price feast driven by government endorsement is facing multiple risks—lawsuits, congressional hearings, and political backlash, any of which could reverse the upward momentum of related stocks.

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

Market strategists point out that the gains in these stocks largely stem from brief surges following news announcements, followed by significant declines, indicating that the price momentum brought by government endorsement is inherently fragile. Henrietta Treyz, co-founder of research firm Veda Partners, bluntly stated, "The Democratic-led committee's summons of corporate executives and government officials to hearings is one of the risks that investors need to pay attention to right now."

Government Investment Wave: Stunning Gains, But Mostly Short-lived

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

The numbers on paper are quite impressive. Intel's stock price has risen over 300% since news of the Trump administration's negotiations to invest last year; MP Materials has risen 87% since the Department of Defense invested $400 million last July; Trilogy Metals has increased 73% since the U.S. government agreed to acquire a 10% stake last October.

However, the structure of these gains is concerning. Trilogy Metals' stock surged from $2.09 to a high of $10.60 within days of the announcement, then quickly fell back, currently trading at $3.62. MP Materials saw its stock soar over 150% within five weeks of the government investment, but has since fallen nearly 27% over the past year. Intel peaked 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, Sustainability, and Transformation Strategy at Jefferies, attributes this surge to a logic: "You now have a government client and spokesperson, and the market believes it will make your company successful." However, the sustainability of this logic is increasingly being questioned.

Election Risks: If the Democrats Turn the Tide, Hearings Will Become the New Battleground

The midterm elections pose the most direct political risk hanging over these stocks. Polls indicate that the Democratic Party is likely to win 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 investment in Intel. If the Democrats win the Senate, Warren will become the chair of the Senate Banking Committee, at which point she will have the legal power to summon witnesses and request documents.

Henrietta Treyz stated, "The Democrats will look for every opportunity to attack the president for as long as possible." She anticipates that the Democratic-led committee will summon corporate executives and government officials to testify on Capitol Hill, "which poses risks to corporate brands and stock prices, and is one of the most important concerns for investors right now."

This political pressure is not without precedent. In 2009, both the Bush and Obama administrations faced fierce criticism from Republicans due to government investments in General Motors, which gave rise to the Tea Party movement. The difference is that the government was bailing out companies on the brink of bankruptcy back then, while the Trump administration is actively "picking winners"—this shift in logic may change the nature and intensity of political backlash.

Legal Risks: If the Lawsuit Prevails, the Entire Portfolio Could Be Shaken

Compared to elections, legal risks may be more far-reaching. Currently, a shareholder lawsuit is challenging the legality of the government's investment in Intel in court, and its outcome could have a chain reaction affecting the entire government-held portfolio.

The lawsuit claims that the CHIPS Act did not authorize the government to make equity a prerequisite for issuing subsidies and accuses Intel's board of violating fiduciary duties by characterizing the deal as "extortionate." Lutnick has filed a motion to dismiss the lawsuit, stating that the arrangement is authorized under federal law and is crucial to the U.S. defense industrial base; Intel CEO Lip-Bu Tan and other board members have also filed motions to dismiss.

Josh Lipsky, Senior Director of the Geoeconomic Center at the Atlantic Council, warned:

"If the court ultimately rules that the CHIPS Act does not grant the Department of Commerce the power to do what it did with Intel, this will have widespread implications for many such transactions."

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

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

"It is the government's investment that has truly turned the tide and is a key factor in maintaining the stock price. If this factor disappears, what will happen next? That is precisely why we have not increased our holdings."

Structural Hazards: Politically Driven Price Momentum Will Eventually Return to Fundamentals

Above all the risks, there is a more fundamental issue: when the logic behind rising stock prices is political rather than based on fundamentals, that momentum is inherently fragile.

Gina Martin Adams, Chief Market Strategist at HB Wealth Management, pointed out that the risk of government "endorsement" always exists.

"It may have a positive impact on stock prices, but this could partly be a result of investors chasing political trends, which makes the price momentum quite fragile."

Matt Gertken, Head of Geopolitical and U.S. Political Analysis at BCA Research, characterized 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 said.

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

This shift has created considerable stock price increases in the short term, but it has also sown the seeds of overlapping political, legal, and market risks. Analysts believe that as the midterm elections countdown begins, investors are reassessing: how far can this government-endorsed transaction really go?