U.S. defence stocks slide as election bets cloud spending outlook

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US defence stocks slide on election

Highlights

The iShares U.S. Aerospace and Defence ETF fell 16 percent from July to mid-October while S&P 500 rose 3.5 percent, as expectations of a Democratic midterm win increased 20 percent, clouding the outlook for raising annual U.S. defence spending from $1 trillion to $1.5 trillion.
Lockheed Martin, Northrop Grumman, and L3Harris are down more than 20 percent, 35 percent, and 36 percent respectively from early March peaks, reflecting legislative scrutiny of major procurement items despite strong underlying demand driven by global conflicts.
Analysts see continued bipartisan support for missile production, but Democratic gains could bring increased scrutiny of defence budgets as Congress weighs elevating non-defence spending, heightening uncertainty for high-profile Trump-linked projects like 'Golden Fleet' and 'Golden Dome'.

Election expectations reshape defence spending outlook

As reported by the Financial Times, U.S. defence stocks are coming under pressure as investors increasingly bet that a Democratic victory in the upcoming midterms would derail the administration’s plan to lift annual defence spending from $1 trillion to $1.5 trillion.

The iShares U.S. Aerospace and Defence ETF falls 16 per cent between the start of July and mid-October, while the S&P 500 rises 3.5 per cent over the same period. Kalshi data also shows expectations of Democrats retaking both chambers of Congress rising 20 per cent in that stretch.

Robert Stallard, a defence analyst at Vertical Research Partners, says the performance of defence stocks is closely tracking Donald Trump’s political fortunes and the Republicans’ chances of losing the Senate. He argues that defence, usually treated as a bipartisan issue, has become more politically divisive under the current administration.

Although Democrats are widely expected to win the House of Representatives, taking the Senate remains more difficult because 35 of the chamber’s 100 seats are up for election. Tensions between defence secretary Pete Hegseth and Congress over the Iran war, combined with Democratic pledges to reverse domestic spending cuts, are also adding to uncertainty over future military appropriations.

Demand remains strong despite weaker market confidence

Defence shares are underperforming this year despite higher global military spending and unresolved conflicts in Ukraine and the Middle East, which continue to drive demand for U.S. missile systems. Analysts say production bottlenecks and years of backlogs are limiting the market’s enthusiasm, even as the U.S. and its allies replenish munitions stockpiles.

Lockheed Martin is down more than 20 per cent from its early March peak, while Northrop Grumman and L3Harris are down 35 per cent and 36 per cent respectively over the same period. Byron Callan, managing partner at Capital Alpha Partners, says defence executives began the year expecting Republicans to deliver Trump’s proposed extra $500 billion in spending, but lawmakers are now questioning both the process and the scale of some programmes.

Callan says there is still bipartisan support for boosting missile production, but legislators are likely to scrutinise major procurement items such as F-35 fighter jets and Sentinel intercontinental ballistic missiles. He adds that Democrats are not calling for steep defence cuts, but future military spending is likely to be weighed against pressure to raise non-defence budgets.

Some investors believe the market reaction is too severe. Randy Gwirtzman, a portfolio manager at Baron Capital, says small-cap defence stocks are being hit even harder than the largest contractors because of a misconception that a Democratic midterm win would severely damage the sector.

Stallard says projects closely tied to Trump, including a proposed “Golden Fleet” of “Trump-class” battleships and a space-based weapons network called the “Golden Dome”, could face greater political risk. Even so, several major U.S. defence stocks recover this week as investors look ahead to expected solid third-quarter earnings and rotate money out of technology shares amid concerns about AI infrastructure spending.

Analysts still argue that geopolitical instability will continue to underpin long-term demand for American weapons. Cantor Fitzgerald says established defence groups could benefit as enduring conflicts weaken U.S. deterrence and raise the risk of broader global confrontation.

Our earlier article on sovereign borrowing risks explained how prolonged geopolitical tensions and elevated fiscal spending are testing governments’ resilience in a higher-rate environment. It noted that persistent shocks linked to wars in Ukraine and the Middle East can lift energy and food prices, worsen inflation pressures, and squeeze public finances—especially in emerging and frontier markets with heavier debt-service burdens. The piece also highlighted how these dynamics can tighten fiscal headroom and raise refinancing risks as funding costs stay elevated.

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