Defense Stocks Decline Amid Election Concerns
In recent weeks, defense stocks have seen a significant drop as investors speculate that Democrats might win the upcoming midterm elections. This shift could potentially derail President Trump’s ambitious plans for enhanced military spending.
The iShares US Aerospace and Defense ETF, the leading fund in this sector, experienced a 16% decline from early July to mid-October, while the S&P 500 managed to rise by 3.5% during the same timeframe, as reported by the Financial Times.
Early and mail-in voting trends, according to state election data, show Democrats gaining an advantage. Additionally, new polls reveal that left-leaning candidates are meeting critical thresholds in pivotal Senate races, particularly in Texas and Alaska.
Even though Democrats are still facing challenges in securing control over both the House and Senate, analysts suggest that defense investors have reason to be anxious about the midterms. Military spending has increasingly become a partisan issue, as noted by the Financial Times.
Trump is pushing for a $500 billion increase in military funding, which would raise annual defense spending from $1 trillion to $1.5 trillion. However, this budget will require congressional approval, and Democrats could easily target some of Trump’s most high-profile projects, such as the “Golden Dome” or the “Trump class” battleships.
Robert Stallard, a defense analyst at Vertical Research Partners, stated, “Anything that has Trump’s name on it or the word ‘golden’ could be at risk.”
Many top defense stocks fell as investors reacted to ongoing inflation concerns, rising Treasury yields, and a push to reverse some of Trump’s previous budget cuts, suggesting this might hinder congressional support for the proposed military spending increase. For instance, on Monday, Northrop Grumman, GE Aerospace, General Dynamics, and Honeywell International saw their shares drop by 1.3%, 0.8%, 0.5%, and 0.1%, respectively. Lockheed Martin also ended the day slightly down.
That said, some U.S. defense stocks showed signs of recovery on Monday, with Boeing’s shares increasing by 1.2%, though the company is still down 4.4% for the month.
Interestingly, despite the ongoing conflicts in Russia-Ukraine and the Middle East—which might typically benefit defense contractors—the industry is grappling with supply chain disruptions and diminishing weapon stockpiles.
Lockheed Martin has seen its stock fall more than 20% since reaching its highest point in early March, while Northrop Grumman and L3 Harris have experienced declines of 35% and 36%, respectively, in the same period.
Byron Callan, managing partner at Capital Alpha Partners in Washington, noted that many defense executives began the year with optimism about a larger military budget. However, he suspects there remains bipartisan backing for replenishing depleted military stockpiles, though lawmakers may question expensive projects 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,” he remarked. “Democrats are going to be wanting to increase non-defense spending, and so defense is likely to be subsumed into those discussions.”
