Defense Stocks Slide as Investors Price In Midterm Funding Gridlock
Lockheed Martin, Northrop Grumman, RTX, Boeing, and General Dynamics have posted losses in September, with the aerospace and defense sub-index trailing the broader S&P 500. The pattern is familiar: every two years, the sector gets repriced ahead of midterm elections, and 2026 is no exception.
The trigger is not declining budgets. The Department of Defense requested $849 billion for 2025, and nominal spending has held near record levels despite the 1% growth cap imposed by the Fiscal Responsibility Act of 2023. Investors are pricing in a calendar problem: a Democratic majority in either chamber historically brings longer debates over discretionary defense spending, slower passage of the National Defense Authorization Act, and a higher likelihood of Continuing Resolutions that freeze new contract awards for months.
Why the NDAA timeline matters
The NDAA is Congress's annual vehicle for approving new weapons systems, shipbuilding programs, and multi-year procurement cycles. When it passes on schedule in early autumn, prime contractors can sign deals and obligate funds before the fiscal year ends. When it stalls, the DoD operates under a CR, which permits existing contracts to continue but bans new starts. For a company like General Dynamics, which depends on winning fresh submarine contracts, a four-month CR can push a $3 billion award into the following year, delaying revenue recognition and compressing the following quarter's earnings.
The market assigns probability to this outcome by compressing forward price-to-earnings multiples. The valuation compression reflects an assumption that money to buy F-35s will arrive late rather than that demand for them has fallen.
The subsector hedge
Not every corner of defense is equally exposed. Cybersecurity firms, microelectronics suppliers, and counter-drone manufacturers enjoy bipartisan support that survives most election outcomes. The Indo-Pacific focus has made anything related to the "pacing challenge" of China a funding priority regardless of which party controls the gavel. Anduril, Shield AI, and similar firms building autonomous systems have attracted private capital at valuations that assume defense budgets remain elevated because the geopolitical floor has risen.
Traditional prime contractors lack that insulation. Their revenue base is steel, lead, and legacy platforms: aircraft carriers, fighter jets, armored vehicles. A Democratic majority often pivots toward electrification of tactical fleets and energy-resilient installations, which sounds like defense spending but routes dollars to different vendors. The shift is incremental, but for a contractor holding a $12 billion backlog in turbine engines, incremental is enough to matter.
Foreign sales as ballast
One stabilizer is Foreign Military Sales. FMS contracts flow through the same contractors but are insulated from domestic appropriations fights. Poland's order for 32 F-35As, Taiwan's Harpoon missile purchases, and Australia's submarine partnership keep production lines active even when Congress stalls. The limitation is that FMS deals take years to negotiate and require State Department approval, so they buffer revenue but cannot replace a domestic budget that drops by 5% in real terms.
The lame-duck session between November and January will clarify whether this selloff was accurate. If the outgoing Congress clears the NDAA before the new members take office, the compression reverses. If it doesn't, the underperformance extends into Q1 2027, and the companies with the longest contract cycles take the deepest hit.
Lockheed Martin, Northrop Grumman, RTX, Boeing, and General Dynamics have posted losses in September, with the aerospace and defense sub-index trailing the broader S&P 500. The pattern is familiar: every two years, the sector gets repriced ahead of midterm elections, and 2026 is no exception.
The trigger is not declining budgets. The Department of Defense requested $849 billion for 2025, and nominal spending has held near record levels despite the 1% growth cap imposed by the Fiscal Responsibility Act of 2023. Investors are pricing in a calendar problem: a Democratic majority in either chamber historically brings longer debates over discretionary defense spending, slower passage of the National Defense Authorization Act, and a higher likelihood of Continuing Resolutions that freeze new contract awards for months.
Why the NDAA timeline matters
The NDAA is Congress's annual vehicle for approving new weapons systems, shipbuilding programs, and multi-year procurement cycles. When it passes on schedule in early autumn, prime contractors can sign deals and obligate funds before the fiscal year ends. When it stalls, the DoD operates under a CR, which permits existing contracts to continue but bans new starts. For a company like General Dynamics, which depends on winning fresh submarine contracts, a four-month CR can push a $3 billion award into the following year, delaying revenue recognition and compressing the following quarter's earnings.
The market assigns probability to this outcome by compressing forward price-to-earnings multiples. The valuation compression reflects an assumption that money to buy F-35s will arrive late rather than that demand for them has fallen.
The subsector hedge
Not every corner of defense is equally exposed. Cybersecurity firms, microelectronics suppliers, and counter-drone manufacturers enjoy bipartisan support that survives most election outcomes. The Indo-Pacific focus has made anything related to the "pacing challenge" of China a funding priority regardless of which party controls the gavel. Anduril, Shield AI, and similar firms building autonomous systems have attracted private capital at valuations that assume defense budgets remain elevated because the geopolitical floor has risen.
Traditional prime contractors lack that insulation. Their revenue base is steel, lead, and legacy platforms: aircraft carriers, fighter jets, armored vehicles. A Democratic majority often pivots toward electrification of tactical fleets and energy-resilient installations, which sounds like defense spending but routes dollars to different vendors. The shift is incremental, but for a contractor holding a $12 billion backlog in turbine engines, incremental is enough to matter.
Foreign sales as ballast
One stabilizer is Foreign Military Sales. FMS contracts flow through the same contractors but are insulated from domestic appropriations fights. Poland's order for 32 F-35As, Taiwan's Harpoon missile purchases, and Australia's submarine partnership keep production lines active even when Congress stalls. The limitation is that FMS deals take years to negotiate and require State Department approval, so they buffer revenue but cannot replace a domestic budget that drops by 5% in real terms.
The lame-duck session between November and January will clarify whether this selloff was accurate. If the outgoing Congress clears the NDAA before the new members take office, the compression reverses. If it doesn't, the underperformance extends into Q1 2027, and the companies with the longest contract cycles take the deepest hit.
Sources
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