US defence stocks have been dragged down by growing expectations of a Democratic sweep in the upcoming midterm elections, as investors bet that the Trump administration’s plans for a $500bn boost to military spending will be scrapped. The industry-standard iShares US Aerospace and Defence ETF fell 16 per cent between the beginning of July and mid-October, compared with a 3.5 per cent rise in the US benchmark S&P 500 index. Over the same period, expectations that Democrats will retake both chambers of Congress in November rose 20 per cent, according to prediction-market platform Kalshi. "[US President Donald] Trump’s political fortunes and the chance of the Republicans losing the Senate have almost been in lockstep with the performance of defence stocks," said Robert Stallard, a defence analyst at Vertical Research Partners. "Usually, defence is a bipartisan issue, but this administration has made defence partisan."
Democrats are widely expected to win a majority in the House of Representatives in the midterms but face an uphill battle to take back control of the Senate, where 35 seats of the 100-member upper chamber of Congress are up for grabs. There was widespread excitement among defence investors and executives in January when Trump proposed increasing annual defence spending from $1tn to $1.5tn to build a "dream military". But relations between defence secretary Pete Hegseth and Congress have soured over the Iran war, while Democrats have vowed to reverse deep cuts to domestic programmes. Concerns over inflation and rising Treasury yields have also cast doubt on bipartisan support for higher military spending.
Shares in US defence companies have underperformed this year, despite a surge in global defence spending and unresolved conflicts in Ukraine and the Middle East that have fed a boom in demand for American missile systems. Lockheed Martin, the prime contractor for the in-demand Patriot missile defence system, is down more than 20 per cent from its early March peak, while fellow leading defence companies Northrop Grumman and L3Harris are down 35 per cent and 36 per cent, respectively, over the same period. Byron Callan, managing partner of research firm Capital Alpha Partners in Washington, noted that several defence executives had expressed optimism at the start of the year that the Republicans would deliver on Trump’s proposed extra $500bn in defence spending. But Democrats are unhappy with how some of the defence funding has been pushed through Congress.
Source: Financial Times Companies · Summarized by HeadlinesBriefing