Risk of U.S. midterm ‘blue wave’ leaves defence stocks out of favour

Skip to Content News Archives Economy Energy Oil & Gas Renewables Electric Vehicles Mining Commodities Agriculture Real Estate Mortgages Mortgage Rates Finance Banking Insurance Fintech Cryptocurrency Work Wealth Smart Money Wealth Management Investor Personal Finance Family Finance Retirement Taxes High Net Worth FP Comment Executive Women Puzzmo Newsletters Financial Times Business Essentials More Innovation Information Technology FP500 Podcasts Small Business Lives Told Tails Told Shopping Financial Post Store Obituaries Place a Notice Advertising Advertising With Us Advertising Solutions Postmedia Ad Manager Sponsorship Requests Classifieds Place a Classifieds ad Working Profile Settings My Subscriptions My Offers Newsletters Customer Service FAQ News Economy Energy Mining Real Estate Finance Work Wealth Investor FP Comment Executive Women Puzzmo Newsletters Financial Times Business Essentials This advertisement has not loaded yet, but your article continues below.HomeInvestorRisk of U.S. midterm ‘blue wave’ leaves defence stocks out of favourEven bullish investors agree the next few weeks will be turbulent for the stocksAuthor of the article:The ramp-up in geopolitical tensions around the globe, along with a push toward higher defence spending in Europe and around the world, bode well for military contractors. Photo by Michael Nagle/Bloomberg via Getty ImagesAfter two years of breakneck gains, shares of United States military contractors have hit a wall this year. Traders are expecting the pain to deepen further as they position for protracted negotiations and funding delays should Democrats take control of one or both houses of Congress following the United States midterm elections.THIS CONTENT IS RESERVED FOR SUBSCRIBERS ONLYSubscribe now to read the latest news in your city and across Canada.Exclusive articles from Barbara Shecter, Joe O'Connor, Gabriel Friedman, and others.Daily content from Financial Times, the world's leading global business publication.Unlimited online access to read articles from Financial Post, National Post and 15 news sites across Canada with one account.National Post ePaper, an electronic replica of the print edition to view on any device, share and comment on.Daily puzzles, including the New York Times Crossword.SUBSCRIBE TO UNLOCK MORE ARTICLESSubscribe now to read the latest news in your city and across Canada.Exclusive articles from Barbara Shecter, Joe O'Connor, Gabriel Friedman and others.Daily content from Financial Times, the world's leading global business publication.Unlimited online access to read articles from Financial Post, National Post and 15 news sites across Canada with one account.National Post ePaper, an electronic replica of the print edition to view on any device, share and comment on.Daily puzzles, including the New York Times Crossword.REGISTER / SIGN IN TO UNLOCK MORE ARTICLESCreate an account or sign in to continue with your reading experience.Access articles from across Canada with one account.Share your thoughts and join the conversation in the comments.Enjoy additional articles per month.Get email updates from your favourite authors.THIS ARTICLE IS FREE TO READ REGISTER TO UNLOCK.Create an account or sign in to continue with your reading experience.Access articles from across Canada with one accountShare your thoughts and join the conversation in the commentsEnjoy additional articles per monthGet email updates from your favourite authorsSign In or Create an AccountStocks of companies that manufacture everything from tanks, fighter jets and Navy ships to missiles, drones and other defence technologies have deeply lagged behind the broader market this year amid doubts about U.S. President Donald Trump’s ambitious budget for the Pentagon and steep valuations.Hopes that Trump’s pledge to turbocharge the budget to US$1.5 trillion would lead to a bonanza for weapons makers had sent defence stocks on a historic rally. But now polls and prediction markets are pointing toward the strong likelihood that Democrats gain control of the House of Representatives following the Nov. 3 vote, while the outlook for which party controls the Senate is closer to a toss-up.Canada's best source for investing news, analysis and insight.By signing up you consent to receive the above newsletter from Postmedia Network Inc.A welcome email is on its way. If you don't see it, please check your junk folder.The next issue of Investor will soon be in your inbox.We encountered an issue signing you up. Please try again“If Democrats win and split Congress, then the fight for additional defence spending will be under a much tighter microscope where justifications for each program will undergo greater scrutiny,” said Wayne Sanders, an analyst with Bloomberg Intelligence. “This means that munitions will most likely be looked at individually instead of a larger pool of money that could cover air defence platforms and other weapon systems.”A gauge for the group of stocks — the S&P Composite 1500 Aerospace & Defense index — is down 13 per cent since Feb. 27, right before the Iran conflict started. The S&P 500 index has gained nearly 10 per cent over the same period. A fund tracking the sector — the iShares U.S. Aerospace & Defense ETF — is on pace for two back-to-back quarters of net outflows, for the first time since 2023.The biggest decliners in the group include space and missile systems provider Karman Holdings Inc., defence-tech company Kratos Defense & Security Solutions Inc., and drone maker AeroVironment Inc., with drops of at least 38 per cent since the end of February. Larger traditional big-ticket defence contractors such as Northrop Grumman Corp., Lockheed Martin Corp., Huntington Ingalls Industries Inc. and L3Harris Technologies Inc. have also fallen by at least 18 per cent.“There might be some more pressure on the group just because of its elevated price-to-earnings ratio, at least as it relates to its average over the past 30 years,” said Eric Sterner, chief investment officer at Apollon Wealth Management. “We could see some more weakness between now and election day.”The defence stocks index is currently trading at 27 times forward earnings, according to data compiled by Bloomberg. That compares with a 30-year average of about 18, and S&P 500’s current multiple of 19.The Trump administration has requested a budget of US$1.5 trillion for national defence in fiscal 2027, including US$1.15 trillion in discretionary funding and US$350 billion through reconciliation — a fast-track approval process Congress can use to provide mandatory defence funding. The 2027 fiscal year starts Oct. 1. Senate Majority Leader John Thune has said he doesn’t expect Republicans to take up the budget resolution before the midterm election.This advertisement has not loaded yet.This advertisement has not loaded yet, but your article continues below.With temporary fiscal 2027 funding set to run through Dec. 11, the post-election lame-duck period could become an important test of whether investors view the sector’s recent weakness as an opportunity to buy or a reason to keep money elsewhere, analysts said.The current pullback in the sector is “actually a healthy thing,” said Apollon’s Sterner. “Typically you see the markets trade sideways ahead of an uncertainty and then once that uncertainty is removed, we could see some of these stocks re-energized.”And the longer term outlook for defence remains strong, analysts and investors said. While congressional uncertainty could shape appropriations, oversight and program priorities, the broader push to modernize the military remains intact, they said.“There’s still a strategic case for modernization of the military, and it does really kind of cross across most of the political spectrum,” said Don Hagan, chief investment officer at Arax.The ramp-up in geopolitical tensions around the globe, along with a push toward higher defence spending in Europe and around the world, bode well for military contractors, analysts and investors noted.“We’re in a scenario where we have no choice but to continue to actively add to defence because of the changing face of what the defence industry is building and requiring,” said Philip Blancato, chief market strategist at Osaic Holdings.Nevertheless, even bullish investors agree the next few weeks will be turbulent for the stocks.“Investors seem to be pricing in a blue wave and seemingly assuming the worst for the sector,” said Guggenheim analyst Michael Ciarmoli.We apologize, but this video has failed to load.Notice for the Postmedia NetworkThis website uses cookies to personalize your content (including ads), and allows us to analyze our traffic. 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