Defense stocks, including major players like Lockheed Martin Corp., RTX Corp., and Northrop Grumman Corp., have seen significant declines of roughly 14% since the Iran conflict began. This selloff is primarily attributed to investor concerns that a Democratic "Blue Wave" in the midterm elections could lead to substantial cuts in Pentagon budgets. The market's anticipation of this political shift is overshadowing geopolitical tensions and record order backlogs within the sector.
Despite this market pessimism, analysts and industry data suggest a disconnect between political fears and fundamental realities. Historically, defense spending has been a bipartisan issue, with both parties tending to increase or maintain high levels of military expenditure during times of rising geopolitical risk. Furthermore, companies like General Dynamics have reported record backlogs, with one reaching $118 billion, indicating strong, multi-year revenue visibility through already contracted deals.
Citi analysts have identified buying opportunities in the aerospace-defense sector, suggesting that the current discount reflects overblown political risks. While the sector traded at a premium with a forward P/E of approximately 23x compared to the S&P 500's 18.6x as of January 2026, its price-to-growth ratio was narrower, indicating that its premium was justified by strong earnings growth. The recent selloff has likely compressed this valuation gap further.
However, other analysts, such as Bernstein, are more cautious, indicating that defense stocks are unlikely to rebound before the November election, as catalysts that previously boosted the sector, like the Iran war, have faded. The risk for investors is a genuine Democratic sweep in Congress combined with meaningful defense budget cuts, although this is seen as unlikely given the global security environment. For now, the sentiment remains that political fear is creating an asymmetric risk/reward scenario, presenting potential opportunities for investors looking to build positions in the sector, either through individual stocks like General Dynamics or ETFs like the iShares U.S. Aerospace & Defense ETF (ITA).
