Author: Wall Street News
Investors who followed the Trump administration and took stakes in public companies have made a lot of money over the past year. But as the midterm elections approach and the Democratic Party is expected to take back at least one house of Congress, this stock price feast driven by government endorsements is facing multiple risks-Lawsuits, congressional hearings, political backlash, any one of them could reverse the gains in related stocks.
On August 29, Bloomberg reported that polls showed that the Democratic Party’s chances of winning were increasing. Market strategists warned that once the Democratic Party controls the Senate or House of Representatives, congressional investigations into government-owned companies will follow, and corporate brands and stock prices will face impacts. Meanwhile, a shareholder lawsuit is challenging the legality of the government’s stake in Intel in court—If the court rules that the Chip Act does not give the Department of Commerce the power to exchange equity for subsidies, the legal foundation of the entire government shareholding portfolio will be shaken。
Market strategists pointed out that most of the gains in these stocks came from a short burst after the news was announced, and then fell sharply, indicating that the stock price momentum brought by government endorsement is itself quite fragile. Henrietta Treyz, co-founder of research agency Veda Partners, said bluntly,The Democratic-led committee summoning business executives and government officials to attend hearings "is one of the risks that investors need to pay most attention to right now."
The wave of government investment in shares: The rise is astonishing, but most of it is short-lived
The Trump administration has pursued an unprecedented strategy:Exchange government funds for equity in listed companies and directly inject state capital into private companies.This approach quickly ignited market enthusiasm, with retail investors and institutional investors competing to bet on the next "government-selected" target.
The book figures are quite eye-catching. Intel's stock price has risen by more than 300% since it was reported last year that the Trump administration was negotiating to take a stake; MP Materials has risen by 87% since the Department of Defense spent $400 million to take a stake in July last year; Trilogy Metals has risen by 73% since the U.S. government agreed to acquire a 10% stake in it in October last year.
However,The structure of these increases is cause for caution.Trilogy Metals U.S. shares soared from $2.09 to a high of $10.60 in the days after the deal was announced, then quickly fell back to currently trade at $3.62. MP Materials soared more than 150% within five weeks after the government took a stake, but fell nearly 27% in the following year. Intel peaked in June after Trump announced that Apple would cooperate with it to design and produce semiconductors.It has since fallen 37%, making it one of the worst-performing stocks in the S&P 500 over the same period.。
Aniket Shah, global head of Washington, sustainability and transformation strategy at Jefferies, puts the rally down to a logic:"You now have a government client and spokesperson that the market trusts will make your company successful." But the sustainability of this logic is being increasingly questioned.
Election risk: If Democrats flip, hearing room will become new battleground
The midterm elections are the most immediate political risk hanging over these stocks. Opinion polls show Democrats are on track to win a majority in at least one house of Congress, and once they take over the power of committee chairs, the investigative machine will be set in motion.
Democratic Senator Elizabeth Warren has taken the lead. She wrote a letter to Commerce Secretary Howard Lutnick questioning the legality of the government's investment in Intel. If the Democrats win the Senate, Warren will serve as chair of the Senate Banking Committee, which will give her the legal power to subpoena witnesses and obtain documents.
Henrietta Treyz said,Democrats "will use every opportunity to defeat the president for as long as possible". She expects Democratic-led committees to call business executives and government officials to testify on Capitol Hill."This poses a risk to both the corporate brand and the stock price, and is one of the most important concerns for investors right now."
Such political pressure is not without precedent. In 2009, the Bush and Obama administrations were fiercely criticized by Republicans for the government's investment in General Motors, which gave birth to the Tea Party movement. The difference is thatBack then, the government was bailing out companies on the verge of bankruptcy, but today the Trump administration is taking the initiative to "pick winners." This logical shift means that the nature and intensity of the political backlash may be different.
Legal risk: If the lawsuit is successful, the entire holding portfolio may be shaken
The legal risks may be more far-reaching than the election.A shareholder lawsuit is currently challenging the legality of the government's stake in Intel in court, the outcome of which could have ripple effects across the government's holdings.
The lawsuit asserts that the Chip Act does not authorize the government to use equity as a prerequisite for issuing subsidies, and accuses Intel's board of directors of breach of fiduciary duties by characterizing the transaction as a "blackmail" expropriation. Lutnick has applied to the court to dismiss the lawsuit, saying that the relevant arrangements are authorized under federal law and are critical to the U.S. defense industrial base; Intel CEO Lip-Bu Tan and other board members have also filed a motion to dismiss.
Josh Lipsky, senior director of the Geoeconomics Center at the Atlantic Council, warns:
"If the courts ultimately rule that the CHIP Act does not give the Department of Commerce the authority to do what Intel did, that will have broad implications for many of these deals."
Ann Lipton, a law professor at the University of Colorado, further pointed out,Such a ruling would also call into question equity investments made by the Commerce Department using CHIP Act funds in other companies, including IBM and GlobalFoundries.
Mark Malek, chief investment officer of Siebert Financial, spoke frankly about the market's dilemma. His company owns Intel stock and he said:
"It's the government investment that really turned things around and was a big factor in sustaining the share price. If that factor goes away, what happens next? That's exactly why we're not overweight."
Structural risks: Politically driven stock price momentum will eventually return to fundamentals
On top of all the risks, there is a more fundamental question:When the logic of rising stock prices is political rather than fundamental, the momentum itself is extremely fragile.
Gina Martin Adams, chief market strategist at HB Wealth Management, pointed out that the risk of government "endorsement" always exists.
"It may have had a positive impact on stock prices, but that may be partly a result of investors chasing political trends, which makes stock price momentum quite fragile."
Matt Gertken, director of geopolitics 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. "There are going to be ups and downs in this process," he said.
From a broader perspective, the Trump administration's strategy has subverted the traditional logic of government intervention in private enterprises - in the past it was bailout, now it is support.
This change has created considerable stock price gains in the short term, but it has also hid hidden dangers from the superposition of political, legal and market risks. Analysts believe that as the countdown to the mid-term elections begins, investors are reassessing:How far can this deal driven by government endorsement go?