Investors are getting concerned that we may be near a period of 'peak' defense spending, especially if control over Congress becomes divided

Vehicles drive past a SpaceX Falcon 9 rocket displayed outside SpaceX's facility in Hawthorne, Calif.

As SpaceX's stock has sold off, so have others in the space sector - but there are factors behind the broader sector weakness beyond pressure on its most high-profile player.

Namely, investors are getting jittery that approval of new defense spending could become a slog if Democrats take control of the U.S. House of Representatives this fall. The upcoming midterm elections and a lack of clarity around the conflict with Iran could set up for "protracted negotiations within Congress," Citizens analyst Trevor Walsh said in a client note.

Of course, volatility is nothing new for space stocks. A space-stock basket put together by Goldman Sachs is roughly twice as volatile as a similar basket made up of artificial-intelligence companies, and five times as volatile as the S&P 500 SPX.

Still, the recent decline has been harsh. The Procure Space ETF UFO shed 22.4% of its value in June and has fallen another 13.5% so far in July, according to FactSet. Similar losses have been staged by the Roundhill Space and Technology ETF MARS and other funds that track space stocks.

Intuitive Machines' stock (LUNR) is down 42% so far this month alone, while Satellogic shares (SATL) have dropped 38%. At least 10 space stocks, including AST SpaceMobile $(ASTS)$ and Planet Labs $(PL)$, have shed at least 30% in July, per FactSet data.

The downturn has been rough for even some of the space industry's biggest proponents. Jacob Keeton, a retail investor previously profiled by MarketWatch for his huge stake in Rocket Lab (RKLB), said last week on X that he was "wiped out" after making risky bets.

The steep declines in part reflect concerns that the midterms could put pressure on defense spending. Many analysts have forecast that President Trump's Republican Party will lose its grip on at least the House, although its control of the Senate is not considered as endangered.

"A potential House flip could pressure highest-growth/least-entrenched defense buckets, particularly reconciliation-funded initiatives, supplementals and new-start programs," KeyBanc analyst Michael Leshock said in a Monday report. "We believe much of the recent decline in defense-tech names reflects this debate."

Citi analyst John Godyn also said in a client note last week that investors "appear concerned about 'peak defense' and a possible 'blue wave.'" Many Democrats in both the House and Senate this month voted against laying out funding for the Pentagon, a typically bipartisan event.

A more politically divided Congress could delay approval of or reduce the size of the White House's requested $1.5 trillion defense budget, Leshock said, with about $350 billion of that requested through reconciliation. Many space companies rely on U.S. government contracts; Rocket Lab, for one, won a $266 million defense contract on Monday.

In addition to the funding concerns, investors may also be adjusting their bets on space in the wake of SpaceX's $(SPCX)$ post-IPO selloff. Despite recovering nearly 3% on Tuesday, SpaceX shares are trading about 48% below their high.

"A lot of these stocks got the 'halo' effect or benefit[ted] in the lead-up to the SpaceX IPO," Walsh told MarketWatch. "They kind of got caught up in that swing, and now as the dust is semisettling ... just as they went up, they're kind of now coming down along with SpaceX."

SpaceX is set to report earnings for the first time as a public company next Tuesday - potentially setting the sector up for a fresh bout of volatility.

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-William Gavin