(Bloomberg) -- US defense contractors are on shaky ground just a month into the new administration — taking a backseat to European peers — as mounting concerns over a deluge of policies including a tightened military spending budget send shock waves across the government-sensitive group.
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The S&P 500 Aerospace and Defense Index is on track for its fourth straight week of losses, the longest stretch in over a year. In contrast, European arms makers, which have historically languished in comparison, posted their best week in 16 months.
The bifurcation in performance comes as instability abounds amid lingering political uncertainties in the US, while Europe ramps up its investment in modernizing its previously-neglected defense capabilities following the Russia and Ukraine conflict.
From President Donald Trump talking about cutting the US defense budget in half, Defense Secretary Pete Hegseth’s plan to reduce projected US military spending by 8% over the next five years and Elon Musk’s X posts criticizing F-35 fighter jets, US investors are hesitant to show any real conviction toward the group, according to Bloomberg Intelligence analyst Will Lee.
US defense primes like Lockheed Martin Corp. and General Dynamics Corp. have tumbled some 19% and 13% over the past three months, while Northrop Grumman Corp.’s shares are poised for their worst month in two years. Muted earnings outlooks coupled with lack of clarity surrounding the new government’s plans, including the Department of Government Efficiency’s upcoming priorities, sparked volatility across the sector.
Analysts including Morgan Stanley’s Kristine Liwag and RBC Capital Markets’ Ken Herbert continue to see risk for defense primes in the early DOGE era. Herbert expects significant segments of the defense budget will be protected, but says incremental uncertainty will continue to weigh on defense stocks, keeping investors on the sidelines until long-term visibility is improved.
Nevertheless, Herbert emphasizes that now could be the perfect time to snap up shares with defense sentiment bottoming and primes trading at what has historically been a “buying opportunity,” according to a note to clients Wednesday.
Bloomberg Intelligence’s Lee notes that “US defense primes will figure out how to align their portfolio to Trump administration priorities if they’re not already.”