Defense Stocks Have Been Surprisingly Weak Since the Iran War Started. Now There's a New Problem. -- Barrons.com

Dow Jones
04/27

By Al Root

Investors have been flummoxed by a weak defense sector lately. The war, peak spending, and extended valuations are reasons for a selloff.

There are rumblings of a new problem: Politics.

Coming into Monday trading and since the start of the Iran war, shares of Lockheed Martin, Northrop Grumman, RTX, General Dynamics, and L3Harris Technologies, a good proxy on how the sector is doing, were down an average of 15%.

That's despite needing to replenish a lot of missiles fired into Iran, and a $1.5 trillion fiscal year 2027 defense budget request from President Donald Trump.

To be sure, the stock market can be fickle. Buy the rumor and sell the news is the saying. The budget and fighting represent an environment that can't get much better, so time to take profits.

Politics might be another issue for investors to consider. Last week, Citi analyst John Godyn pointed out that the selloff also coincided with a potential "blue wave" in midterm elections, as President Donald Trump's popularity slid.

Odds on prediction markets that Democrats would retake the Senate recently rose above 50%.

The slide has caused a lot of "head scratching," wrote Vertical Research Partners analyst Rob Stallard on Monday. "While we have proposed a couple of possible theories, one that we have not previously looked at empirically is the link between the sector's performance and US politics."

Now he has, noting a "remarkable correlation" between the sector and President Donald Trump's approval ratings.

Defense is generally a bipartisan issue, but Democrats might not see the need to spend $1.5 trillion. Of course, few expected the spending to rise roughly 50% from the fiscal year 2026 request. What the stocks are priced for these days is essentially double-digit earnings growth for the coming few years.

It won't take a $1.5 trillion budget to accomplish that. Spending increases of 5% to 8% annually would be enough.

"Given the timelines involved in actually passing U.S. defense budgets, we think investors are skeptical that fiscal year 2027 will get done before the midterms," added Stallard. "Bottom line is that we could see more volatility in U.S. defense shares going forward."

Regardless of midterms, Godyn thinks the sector will be fine.

"Blue Wave or not, we continue to believe that the defense stocks in our coverage that are well-aligned with bipartisan budget priorities can sustain elevated revenue growth rates for some time and that the recent pullback has reached tactical extremes," wrote Godyn.

He rates shares of Northrop, RTX, and L3Harris Buy. He rates Northrop and General Dynamics stocks Hold.

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

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

 

(END) Dow Jones Newswires

April 27, 2026 11:12 ET (15:12 GMT)

Copyright (c) 2026 Dow Jones & Company, Inc.

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