- The BofA US Drone Ecosystem Index has plunged 40% from mid-January through Tuesday’s close, after rising nearly 120% from the end of 2024, while the S&P 500 has gained 11% over the same period. Investors now fear a Democratic win in next week’s midterms could squeeze the funding behind the rally.
- The Pentagon’s $1.5 trillion fiscal 2027 request includes about $75 billion for drones and counter-drone technology, but about $55 billion earmarked for autonomous warfare is part of a reconciliation package that could be blocked if Republicans lose either chamber. That puts roughly 73% of the drone funding at risk (Lumida calculation).
- Valuations still look stretched. Kratos trades at 36 times forward earnings and AeroVironment at 27 times, with both down more than 45% this year, while Ondas trades at 117 times forward earnings and is 53% below its Jan. 8 peak.
- Recent IPOs show the bubble deflating. Swarmer soared nearly 1,000% in its first three sessions after its March IPO but now trades about 88% below its June 2 high, and Aevex is down 43% this year after doubling in its first two trading sessions.
What Happened?
Shares of drone makers and suppliers including Red Cat, Unusual Machines and AeroVironment are under pressure as investors weigh election risk. “A Democratic sweep would certainly put the reconciliation proposal at risk,” said Jefferies analyst Sheila Kahyaoglu. The American Enterprise Institute’s Todd Harrison said that if reconciliation is off the table, “a lot of this drone funding may never happen,” and Congress could not shift it into the regular budget as quickly or to the same degree.
Why It Matters?
Drone stocks are a direct trade on whether Washington follows through on scaling up unmanned systems, which have featured heavily in the Iran conflict and in Ukraine. A divided Congress would “engender greater scrutiny about defense spending,” said Interactive Brokers’ Steve Sosnick, which could slow procurement for young companies that depend on fast-track funding. Without those funds, Harrison warned, “that could be the end of them” for some drone makers. Traditional defense contractors with diversified backlogs are less exposed than single-product drone companies trading at high multiples.
What’s Next?
The midterm results next week are the key catalyst, followed by how a new Congress handles the reconciliation package and the fiscal 2027 defense budget. Miller Tabak’s Matt Maley said the selloff could offer an entry point because “a lot of the election fear has already been priced in.” Investors will also watch procurement awards and order announcements for evidence that demand holds up regardless of who controls Congress.
Affected Tickers and Coins: KTOS, AVAV, RCAT, UMAC, ONDS, ITA
Source: Bloomberg
