- Defense bucked the rally. Lockheed Martin and Northrop Grumman fell more than 3% before the opening bell on Wednesday, Bloomberg reported, and in morning trading Lockheed and L3Harris were down more than 5% while Northrop and RTX fell around 4%, according to the FT. Palantir, whose software is widely used by military and police forces, was 4.7% lower before the open.
- Europe followed. A Goldman Sachs basket of Europe’s defense firms fell as much as 4.1%, its steepest drop in more than four months, and the UK’s BAE Systems, which gets nearly half its revenue from the US, declined as much as 5.9%. Mwb Research’s Jens-Peter Rieck said the result removes the “US walks away from Europe scare” that drove the sector’s 2025 rally.
- The budget is now in question. Trump had called for $1.5 trillion in defense spending for the fiscal year ending in 2027, up from $1 trillion, according to the FT. TD Cowen’s Roman Schweizer called a Democratic sweep “clearly the toughest outcome for defense spending” and expects the next Congress to vote to compel Trump to end the war in Iran, saying it is now “more conceivable” enough Republicans join to override a veto.
- Not everyone is selling. “The bulk of the defense budget is set in stone,” said Siebert Financial’s Mark Malek, arguing missile replenishment and next-generation defense tech have broad support. Mediobanca’s Alessandro Pozzi pointed to bipartisan backing for air and missile defense, the Golden Dome and shipbuilding, though funding remains subject to political debate.
What Happened?
Defense stocks on both sides of the Atlantic slid as the Democrats’ landslide in the midterm elections dented expectations of a further ramp-up in US military spending, even as the broader US market rallied. The sector had been riding high into 2026 on geopolitical tensions and government plans to boost defense budgets, but it has been volatile as investors braced for a Democratic win that could bring tighter oversight and funding delays. “There are now some more open questions about the path forward for the defense budget,” said Truist Advisory Solutions CIO Keith Lerner. Relations between Defense Secretary Pete Hegseth and Congress have soured over the Iran war, and Democrats have vowed to reverse deep cuts to domestic programs, the FT reported.
Why It Matters?
Prime contractors depend heavily on US government spending, so a shift in Congress hits their growth outlook directly, while Trump’s comments that he has no immediate plans to strike Iran and more dovish talk on a peace settlement point to less urgency for emergency spending. TD Cowen warned the impact “could go well beyond spending and impact national security and foreign policy.” The selloff also shows how much of the sector’s premium was built on the $1.5 trillion budget proposal. Some investors had bought volatility in US defense names ahead of the vote, betting Democrats would still back munitions replenishment after the Iran war depleted stockpiles, which could limit how far the selloff runs.
What’s Next?
The lame-duck session before the new Congress is seated “becomes very important very quickly,” Schweizer said, as members work to pass a baseline defense budget and additional funds through a fast-track measure. RBC Capital Markets’ Ken Herbert said the biggest near-term concern is whether Democrats will back a large supplemental spending bill to cover the costs of the Iran conflict. In Europe, Hensoldt, Rheinmetall and Renk report third-quarter results on Thursday, which Rieck said could bring bigger moves.
Affected Tickers and Coins: LMT, NOC, LHX, RTX, PLTR, ITA
Source: Bloomberg, Financial Times
