U.S. defense stocks rocked by prospect of Democratic midterm victory

[Financial News]  

U.S. defense stocks faced a sharp sell-off amid growing fears that the Trump administration’s $500 billion (about 666 trillion won) increase in defense spending would be scuttled in Congress if Democrats swept the midterms.
According to the Financial Times (FT) on the 19th (local time), the iShares U.S. Aerospace & Defense ETF (ITA), which focuses on the U.S. aerospace and defense sector, plunged 16% from July through the middle of this month. That contrasted with a 3.5% gain in the S&P 500, a benchmark for the New York stock market, over the same period.
During this period, the prediction site Kalshi showed that the probability of Democrats retaking both chambers of Congress in the midterm elections on Nov. 3 had risen by 20%.
Robert Stallard, a defense analyst at Vertical Research Partners, said, “Defense stocks are doing poorly as President Trump’s political fate and the prospect of Republicans losing the Senate become increasingly clear.” He added, “Defense stocks are usually nonpartisan, but this administration has painted them with that color.”
Democrats, who had been widely expected from early on to have a strong chance of retaking the House in the midterms, are now almost certain to regain a Senate majority as oil prices surged after Trump launched the Iran war on Feb. 28. In this midterm election, 35 of the Senate’s 100 seats will be contested.
As recently as January, the situation was different. Defense stocks surged after Trump declared he would increase the defense budget from $1 trillion to $1.5 trillion and build a “dream military.”
But the Iran war turned everything upside down. Democrats are vowing to cut defense spending and expand domestic spending if they take control of Congress.
Moreover, with U.S. Treasury yields rising amid inflation, the view that a major increase in defense spending will be difficult is gaining ground not only among Democrats but also within the Republican Party.
As demand for U.S. missile systems has surged amid regional conflicts such as the wars in Ukraine and Iran, U.S. defense stocks are nevertheless struggling.
Defense contractors are working at full capacity with orders piling up, yet they still cannot keep up with demand. Investors, however, are selling the stocks.
Lockheed Martin, the manufacturer of the Patriot missile, has plunged more than 20% since its early-March peak, while Northrop Grumman and L3Harris have fallen 35% and 36%, respectively, over the same period.

[email protected] Song Gyeong-jae Reporter