Will the "Trump deal" backfire after the election?

Will the "Trump deal" backfire after the election?

Over the past year, investors who followed the Trump administration in acquiring stakes in publicly traded companies have made a fortune. However, with the midterm elections approaching and the Democrats poised to regain control of at least one house of Congress, this government-backed stock market boom is facing multiple risks— lawsuits, congressional hearings, and political backlash—any of which could reverse the stock market's upward trend.

On August 29, Bloomberg reported that polls showed the Democrats' chances of winning were rising, and market strategists warned that if the Democrats control the Senate or House of Representatives, congressional investigations into government-owned companies would follow, impacting corporate brands and stock prices. Meanwhile, a shareholder lawsuit is challenging the legality of the government's stake in Intel— if the court rules that the Chip Act does not grant the Commerce Department the power to exchange equity for subsidies, the legal basis of the entire government-owned portfolio will be shaken .

Market strategists point out that most of these stock gains came from a brief surge after the news was announced, followed by a sharp decline, indicating that the momentum from government endorsement is inherently quite fragile. Henrietta Treyz, co-founder of research firm Veda Partners, bluntly stated that the Democratic-led committee's subpoena of corporate executives and government officials to testify "is one of the risks investors need to pay the most attention to right now."

Government-backed stock market boom: astonishing price increases, but mostly short-lived.

The Trump administration implemented an unprecedented strategy: exchanging government funds for shares in publicly traded companies, directly injecting state capital into private enterprises. This move quickly ignited market enthusiasm, with retail and institutional investors vying to bet on the next "government-selected" target.

The figures on the books are quite impressive. Intel's stock price has risen more than 300% since news broke last year that the Trump administration was in talks to acquire a stake; MP Materials has risen 87% since the Department of Defense invested $400 million in it last July; and Trilogy Metals has risen 73% since the U.S. government agreed to acquire a 10% stake in it last October.

However, the structure of these gains warrants caution. Trilogy Metals' shares surged from $2.09 to a high of $10.60 within days of the deal announcement before quickly retreating to their current price of $3.62. MP Materials' shares soared over 150% in the five weeks following the government's investment, but have since fallen nearly 27% over the past year. Intel peaked after Trump announced in June that Apple would partner with it to design and manufacture semiconductors, and has since fallen 37%, making it one of the worst-performing stocks in the S&P 500 during that period .

Aniket Shah, Global Head of Sustainability and Transformation Strategy at Jefferies, attributes this surge to a logic: "You now have a government client and a spokesperson, and the market believes it will make your company successful." But the sustainability of this logic is being increasingly questioned.

Election Risk: If the Democrats win, the hearing room will become a new battleground.

The midterm elections are the most immediate political risk hanging over these stocks. Polls show that the Democrats are poised to win a majority in at least one house of Congress, and once they gain control of committee chairs, the investigative machine will be activated.

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, giving her the statutory powers to subpoena witnesses and retrieve documents.

Henrietta Treyz stated that Democrats "will do everything in their power to attack the president for as long as possible." She anticipates that the Democratic-led committee will subpoena business executives and government officials to testify on Capitol Hill, "which poses a risk to corporate brands and stock prices, and is one of the most important concerns for investors right now."

This kind of political pressure is not without precedent . In 2009, the Bush and Obama administrations faced fierce criticism from Republicans for the government's acquisition of a stake in General Motors, which spurred the Tea Party movement. The difference is that back then, the government was bailing out a company on the verge of bankruptcy, while today the Trump administration is actively "picking winners"—this shift in logic may lead to a difference in the nature and intensity of the political backlash.

Compared to elections, the legal risks may be more far-reaching. Currently, a shareholder lawsuit is challenging the legality of the government's investment in Intel, and its outcome could have a ripple effect on the entire government-owned portfolio.

The lawsuit argues that the Chip Act does not authorize the government to make equity a precondition for subsidies and alleges that Intel's board of directors breached its fiduciary duty by characterizing the transaction as "extortionate" appropriation. Lutnick has filed for dismissal, arguing 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 for dismissal.

Josh Lipsky, senior director of the Atlantic Council’s Geoeconomics Center, warned:

"If the court ultimately rules that the Chip Act does not grant the Department of Commerce the power to investigate what Intel has done, it will have a wide-ranging impact on many such transactions."

Ann Lipton, a law professor at the University of Colorado, further pointed out that such rulings would also cast doubt on equity investments made by the Department of Commerce using funds from the Chip Act in other companies, including IBM and GlobalFoundries.

Mark Malek, chief investment officer at Siebert Financial, frankly acknowledged the market's dilemma. His company holds Intel stock, and he stated:

"It was the government's investment that truly turned the tide and was a crucial factor in maintaining the stock price. What would happen if this factor disappeared? That's precisely why we haven't increased our holdings."

Structural risks: Politically driven stock price momentum will eventually return to fundamentals.

Above all the risks, there is an even more fundamental problem: when the logic behind rising stock prices is politics rather than fundamentals, this momentum itself is extremely fragile.

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

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

Matt Gertken, director of geopolitics and U.S. politics 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 its 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's about support.

This shift generated a considerable stock price increase in the short term, but it also sowed the seeds of a triple threat: political, legal, and market risks. Analysts believe that with the midterm elections approaching, investors are reassessing how far this government-backed deal can go.

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