Some investors, after having jumped into riskier assets on the assumption that Washington will eventually work out a budget deal, are watching to see what tone Obama adopts for working with the Republicans.
If the president takes a combative approach, "this could provoke a short-term flight to safety, and see equity indices sell off by up to 1 percent as traders anticipate painful negotiations," said Karl Schamotta, senior strategist at Western Union Business Solutions in Calgary.
Watching Defense, Energy Stocks
Most State of the Union speeches see less than a 1 percent move in the stock market on the following day. The average move is only 0.15 percent since 1934, when President Franklin D. Roosevelt first used the term "State of the Union," according to Jeffrey Kleintop, chief market strategist at LPL Financial.
Still, stocks in the defense, retail and energy sectors could see some action, analysts say.
Under the current plan, defense spending will be cut by around 8 percent, while non-defense funding is subject to reductions of 5 to 6 percent, Kleintop said.
If Obama suggests he is open to mitigating the defense cuts, that would be a positive for the sector, which has pulled back lately. Shares of defense companies, such as Lockheed Martin and Raytheon, have recently fallen from 52-week highs in anticipation of budget cuts.
The energy sector is another focus. "Clean energy" companies could get a lift if Obama discusses energy independence, while any remarks on eliminating tax breaks for the exploration and production companies could hit shares of companies such as such as Anadarko Petroleum and ConocoPhillips.
The Jan. 1 deal that Washington struck on the fiscal cliff raised tax rates on the wealthiest Americans and allowed a previous reduction in the payroll tax to expire. That cuts into take-home pay for Americans, but is expected to hit lower- and middle-class citizens harder.
Rick Meckler, president of investment firm LibertyView Capital Management in Jersey City, N.J., said the bigger issue remains the fight on revenues, taxes and spending, which will have a direct impact on consumers.
The Morgan Stanley Retail Index recently hit a 52-week high, but some analysts see those stocks pulling back as consumers feel the effect of the increase in the payroll tax.