Al Root

Defense stocks have been running hot, but rallies don't come without interruptions.

Wednesday's trading action illustrates that. Shares of defense contractors were being hit hard, even without decisively negative news. A combination of profit-taking catalyzed by an investor day at L3Harris Technologies, moves back into software stocks, and President Donald Trump's State of the Union speech may be responsible.

L3Harris stock was down more than 5%, while Lockheed Martin, Northrop Grumman, and General Dynamics all lost more than 3%. The iShares US Aerospace & Defense exchange-traded fund was down 1.9% in early trading.

The S&P 500 and Dow Jones Industrial Average were up 0.5% and 0.2%, respectively.

That ETF started the day up 13% year to date, powered by gains of more than 20% in Northrop, Lockheed, L3, and Huntington Ingalls Industries.

There doesn't seem to be anything particularly wrong with what L3Harris said. It reviewed its 2026 outlook, issued in late January, saying sales should be between $23 billion and $23.5 billion, up from $21.9 billion in 2025. Management expects to expand operating profit margins and free cash flow as well.

It also reviewed its portfolio of technologies, which includes missile, electronic, and space technologies, all things needed by a modern military. In particular, missile technology sales should hit $6.3 billion by 2028, up from $4.4 billion in 2025.

None of it should have surprised investors.

It is also possible that a market rotation is hitting stocks. The State Street SPDR S&P Software & Services ETF was up 2% in midday trading, following a 2026 loss of 22% coming into Wednesday's session.

Trump might have triggered the move out of military stocks. His State of the Union address didn't mention the $1.5 trillion military budget for fiscal year 2027 that he discussed in January.

That also shouldn't be a surprise. The U.S. currently spends about $1 trillion annually on national defense. A 50% increase would be nearly unprecedented and very unlikely, according to Wall Street.

Analysts are fine with the consistent spending growth they expect, without projecting a $1.5 trillion windfall.

Defense investors can console themselves with recent gains. Through midday trading, the defense ETF was up almost 60% over the past 12 months.

Write to Al Root at allen.root@dowjones.com

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(END) Dow Jones Newswires

February 25, 2026 11:35 ET (16:35 GMT)

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