In the U.S., defense company stocks are falling amid fears of a Democratic victory in the election, according to the Financial Times

Shares of leading U.S. defense companies plummeted amid growing expectations that Democrats would win the U.S. midterm congressional elections. Investors fear that if Republicans lose control of Congress, President Donald Trump’s administration’s plans to increase defense spending by $500 billion could be revised or scrapped.

From early July to mid-October, the iShares US Aerospace and Defense ETF, which tracks the performance of the U.S. aerospace and defense sector, lost 16%. Meanwhile, the S&P 500 index rose 3.5%.

According to the Kalshi prediction market platform, over the same period, the probability that Democrats will gain control of both houses of Congress following the November election rose by 20 percentage points.

Robert Stallard, a defense analyst at Vertical Research Partners, noted that Donald Trump’s political prospects and the likelihood of Republicans losing control of the Senate are closely linked to the performance of defense stocks.

“The political fate of [U.S. President Donald] Trump and the likelihood that Republicans will lose control of the Senate almost perfectly align with the performance of defense company stocks,” Robert Stallard said.

He added that defense policy in the U.S. has traditionally been a matter of bipartisan consensus, but the current administration has turned it into a subject of political confrontation.

Democrats are expected to have a strong chance of winning a majority in the House of Representatives. At the same time, the race for the Senate will be more challenging: 35 of the 100 seats in the upper chamber of Congress are up for election.

At the beginning of the year, optimism prevailed among investors and defense industry executives. Donald Trump proposed increasing annual U.S. defense spending from $1 trillion to $1.5 trillion to create, in his words, a “dream army.”

Expectations of an additional $500 billion in funding contributed to positive sentiment in the industry. However, the situation subsequently changed.

Relations between U.S. Secretary of Defense Pete Hagseth and Congress deteriorated amid the war with Iran. Democrats also pledged to reverse significant funding cuts to domestic programs.

Inflation and rising Treasury yields are causing additional concern, making it difficult to reach a bipartisan agreement on increasing military spending.

Byron Callan, managing partner at the Washington-based research firm Capital Alpha Partners, said that at the beginning of the year, some defense industry executives were counting on Republican support for an additional $500 billion in defense funding.

However, Democrats are dissatisfied with how part of the defense funding was routed through Congress. Lawmakers were further outraged by Pete Hagseth’s refusal to provide a detailed report on expenditures related to the conflict in Iran.

Despite rising global defense spending and ongoing conflicts in Ukraine and the Middle East, U.S. defense companies have underperformed the broader stock market this year.

Wars are sustaining demand for American missile systems and other types of weaponry. At the same time, leading manufacturers are already facing years-long production delays, and efforts by the U.S. and its allies to replenish ammunition stocks have not generated the expected surge in investor interest.

Among the leading companies, the hardest hit were:

• Lockheed Martin—shares of the manufacturer, which is the prime contractor for the Patriot missile defense system, have fallen by more than 20% from their peak in early March.
• Northrop Grumman — its stock price fell by 35%.
• L3Harris — shares lost 36% over the same period.

Thus, even high demand for weapons does not guarantee an increase in the market value of defense companies. Investors take into account not only orders but also the prospects for budget funding, production constraints, and political risks.

Byron Callan noted that increasing production of missiles, whose stockpiles have dwindled, has bipartisan support. At the same time, lawmakers may scrutinize spending on expensive military platforms more closely.

Among the programs whose funding may become a subject of debate are the F-35 fighter jets and the “Sentinel” intercontinental ballistic missiles.

“I haven’t heard any Democrats calling for a sharp cut in defense spending, but defense cannot be viewed in isolation,” Cullen explained.

According to him, Democrats will seek to increase spending in other areas, so the defense budget will likely become part of broader negotiations on government spending.

At the same time, Baron Capital portfolio manager Randy Gwirzman believes that investors may be overreacting to the prospect of a shift in the balance of power in Congress. He noted that shares of smaller defense companies have been hit even harder than those of leading manufacturers.

“The misconception is that ‘if the Democrats win the midterm elections, the defense industry will be devastated.’ I really don’t think that’s the case,” Gwirzman said.

Robert Stallard also highlighted the risks to large-scale projects directly associated with Donald Trump. Among them are the so-called “Golden Fleet” of “Trump-class” battleships and the “Golden Dome” space weapons system.

“Anything with the name Trump or the word ‘gold’ in it could be at risk,” Stallard said.

Despite the overall decline, shares of several leading U.S. defense contractors began to rebound this week. Investors are awaiting the release of third-quarter earnings reports next week.

The sector received additional support from a shift in capital away from technology companies amid concerns about excessive spending on artificial intelligence infrastructure.

Analysts emphasize that regardless of the outcome of budget negotiations in the U.S., geopolitical instability will continue to support demand for American weapons.

Investment bank Cantor Fitzgerald believes that leading defense companies could benefit from protracted conflicts that weaken U.S. deterrence capabilities and increase the risk of a larger-scale global confrontation.

Consequently, the future performance of U.S. defense company stocks will depend not only on the results of the midterm elections but also on decisions regarding the military budget, production levels, and the development of international conflicts.

This is reported by the Financial Times.

In the U.S., the nonpartisan election forecaster Sabato’s Crystal Ball revised its projections for 28 House of Representatives races in favor of the Democratic Party two weeks before the midterm elections. According to the forecaster’s new rankings, Democrats have more than the 218 seats needed for a majority, even without winning in districts where candidates are considered to be roughly evenly matched.

Former New York City Mayor Michael Bloomberg spent $80 million in September and October to support Democratic candidates ahead of the November midterm elections. The money was directed toward the Democrats’ efforts to regain control of the House of Representatives.