Defense Stocks Tumble Amid Concerns Over Midterm Election Outcomes
Investor unease grows as potential Democratic gains could curb anticipated military spending increases.
Defense stocks have experienced a significant downturn in recent weeks, driven by investor apprehension about a potential Democratic victory in the midterm elections. Such an outcome could jeopardize President Trump’s proposed increases in military spending.
The iShares US Aerospace and Defense ETF, a leading fund in the sector, saw a 16% decline between early July and mid-October, according to The Financial Times. In contrast, the S&P 500 index increased by 3.5% during the same period.
Early and mail-in voting data suggests Democrats hold an advantage, and recent polls indicate they have achieved critical thresholds in closely contested Senate races in Texas and Alaska. While securing control of both the House and Senate remains a challenge for Democrats, analysts suggest the midterm elections are a cause for concern among defense industry investors. Military spending has become a partisan issue, the FT reported.
President Trump has advocated for a $500 billion increase in military spending, aiming to raise annual defense expenditures from $1 trillion to $1.5 trillion. However, this budget proposal requires congressional approval, and Democrats could potentially challenge high-profile projects.
“Anything that has Trump’s name on it or the world ‘golden’ could be at risk,” stated Robert Stallard, a defense analyst at Vertical Research Partners, in comments to the FT.
Many major defense stocks traded lower on Monday, as investors anticipate that rising inflation, increasing Treasury yields, and a desire to reverse other budgetary cuts may lead Congress to reject the proposed military spending boost. Shares of Northrop Grumman, GE Aerospace, General Dynamics, and Honeywell International fell between 0.1% and 1.3% on Monday, extending recent losses. Lockheed Martin also closed slightly down.
Some U.S. defense stocks showed signs of recovery on Monday, with Boeing rising 1.2%, though the company's stock is still down 4.4% for the month.
Despite geopolitical tensions, including the conflicts in Ukraine and the Middle East, which might typically benefit defense contractors, the industry faces challenges such as supply chain disruptions and depleted weaponry stockpiles. Lockheed Martin's stock has dropped over 20% since its peak in early March, while Northrop Grumman and L3 Harris have fallen 35% and 36%, respectively, in the same timeframe.
Byron Callan, managing partner at research firm Capital Alpha Partners, noted that some defense executives began the year optimistically regarding the potential for a larger military budget. Callan believes there may still be bipartisan support for replenishing military stockpiles, but lawmakers might scrutinize major expenditures like F-35 jets and ballistic missiles.
“I don’t hear any Democrat calling for steep cuts in defense spending, but defense can’t be viewed in isolation,” Callan told the Financial Times. “Democrats are going to be wanting to increase non-defense spending, and so defense is likely to be subsumed into those discussions.”