Following the recent midterm elections where Democrats gained control of both chambers of Congress, defense stocks experienced a notable decline. Analysts at Wolfe Research, led by Myles Walton, indicated that this initial negative reaction may not last, citing historical trends where defense contractors rebounded after similar political shifts.
For instance, Lockheed Martin's shares fell 3.6%, while L3 Harris, RTX Corporation, and Northrop Grumman also saw declines of over 2-3%. The concern stems from the belief that a Democratic majority could scrutinize military spending plans, impacting companies that rely heavily on U.S. government contracts—Lockheed Martin derives about 70% of its sales from the government.
However, Wolfe Research pointed out that past Democratic control did not necessarily lead to reduced defense budgets, as seen after the 2006 elections when military spending continued to rise. The firm also noted that the upcoming fiscal 2027 defense budget will be a critical factor, with potential for a spending package to be approved during the current lame duck session.
Wolfe believes that the defense stock valuations may have reached a low point, suggesting that this could be a buying opportunity for investors