Defense stocks are taking a hit after the Democrats’ sweeping midterm victory, but Wolfe Research sees a reason for investors to look beyond the initial sell-off. Democrats won control of both chambers of Congress in Tuesday’s midterm elections, dealing a major setback to President Donald Trump and raising concerns that military spending plans could face greater scrutiny. “A Democratic sweep is a headline negative for defense stocks,” Wolfe analyst Myles Walton wrote in a Wednesday research note reacting to the blue wave’s impact on defense and aerospace sectors. Walton said, however, that the market’s initial knee-jerk negative sentiment toward defense names should be “potentially short-lived,” pointing to a historical precedent in which defense contractors recovered from an election-driven sell-off as military spending continued to increase. The Democratic sweep of the House and Senate sent defense stocks falling Wednesday. Shares of Lockheed Martin fell 3.6%, L3 Harris stock dipped more than 2%, RTX Corporation and Northrop Grumman both fell more than 3%. LMT YTD mountain Lockheed Martin, YTD The losses reflect concerns that a Democratic-controlled Congress would challenge the Trump administration’s defense spending priorities, creating uncertainty for contractors that depend on federal funding. Lockheed Martin gets about 70% of its sales from the U.S. government. L3Harris also earns most of its revenue from the U.S. government. In fiscal 2025, The percentage of the defense and aerospace company’s revenue derived from sales to the U.S. government was 75%. That came in the form of prime contractors, including foreign military sales, according to the company. RTX Corporation and Northrop Grumman also derive a significant amount of sales from U.S. government contracts. Still, Wolfe Research said it sees similarities between the current political environment and the 2006 midterm elections, when Democrats last took control of both chambers from a sitting Republican president. Defense stocks initially declined roughly 2% following that election before recovering as military budgets continued to rise. Despite the change in congressional leadership, Democrats ultimately supported increased spending to fund U.S. operations in the Iraq War. That precedent suggests a Democratic majority does not necessarily translate to lower defense spending, particularly with ongoing conflicts, including the Iran war and the Russia-Ukraine war. Wolfe also believes defense stock valuations have “likely bottomed multiple-wise since the start of the Iran War,” drawing a comparison to how stock valuations responded during the 2018 midterms. But the more immediate test, Wolfe argued, is the 2027 budget before Democrats take control in January. Wolfe said the fiscal 2027 defense budget is the “near-term catalyst,” with Republicans potentially racing to approve a spending package during its lame-duck session. Given Defense Secretary Pete Hegseth’s inability to sell the budget to Congress, Wolfe said he believes replacing Hegseth with a candidate capable of passing a budget would be the “most bullish path forward for defense spending.”
