Al Root

Shares of major defense contractors zigged while the market zagged on Thursday. That has been a theme recently: It has been an odd week for the sector.

Coming into Thursday trading, Northrop Grumman and Lockheed Martin shares were down about 5% for the week. General Dynamics and L3Harris Technologies were flat, while the S&P 500 gained 4%.

Major defense stocks languished even though President Donald Trump unveiled a $142 billion deal for U.S. military technology with Saudi Arabia. The agreement didn't amount to a significant change in the pace of business, according to Capital Alpha Partners analyst Byron Callan.

He said there were no specifics on what Saudi Arabia would buy, or when, and a similar announcement in 2017 didn't lead to as many sales as expected. That deal was meant to bring $110 billion of sales over 10 years.

Saudi Arabia spent about $72 billion on defense in 2024. The U.S. spent about 12 times that amount.

The market's move higher might have also contributed to the decline in defense. Investors feeling upbeat about the economy will sometimes sell stock in sectors that aren't as correlated with overall economic growth, such as defense, and plow it into shares that are more likely to benefit from better times.

Another problem came in on Wednesday , when Lockheed CFO Evan Scott warned of cost increases in some classified programs and said the U.S. Defense Department could delay finalizing the contract for another batch of F-35 jets -- the so-called Lot 18. The F-35 is the company's advanced fighter jet -- the Pentagon awarded a Lot 18 contract in December worth $11.8 billion for 145 jets. Scott said Wednesday that Lots 18 and 19 could be combined into a single purchase.

"On the plus side, that accelerates...roughly 150 jets of backlog potentially into the second quarter. However, the overall award now is probably going to happen later in the second quarter than if Lot 18 had been a stand-alone," he said.

Lockheed stock dropped 1.9% on Wednesday, but the shares were up 2.2% on Thursday, while the S&P 500 and Dow Jones Industrial Average were up 0.3% and 0.4%, respectively. Investors, apparently, now realize that not much has changed regarding the number of planes ordered and when the money will exchange hands.

Northrop and General Dynamics stock both gained 1.3%, while L3Harris rose 1.7%.

The Northrop rise comes despite worries that the Navy will delay a decision on its sixth-generation fighter jet, which Northrop is believed to be bidding on. Investors are also worried that the coming defense budget will siphon money away from its Sentinel missile program in favor of unmanned fighters.

"Northrop was hit on the [bidding award for the next-generation fighter] and Sentinel double whammy," says Vertical Research Partners analyst Rob Stallard. Now, "supporters are pushing back against the plan cuts."

In the long run, the direction of defense stocks should depend on overall military spending and the companies' ability to deliver needed weapons to America and its allies. That implies gains, but the stocks won't go up in a straight line.

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

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May 15, 2025 13:04 ET (17:04 GMT)

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