Defense Stocks Rebound Into Midterms As Drone Makers Lag

U.S. defense stocks are heading into Tuesday’s midterm elections with momentum on stronger profit outlooks for the year. 

A wave of strong third-quarter earnings has reversed much of a two-month slump tied to election jitters. But drone makers have lagged behind the defense industry’s recovery.

Lockheed Martin Corp. (NYSE:LMT) shares rose about 26% in October. Northrop Grumman Corp. (NYSE:NOC) gained roughly 15% and General Dynamics Corp. (NYSE:GD) climbed about 12% over the same period.

The rally accelerated after Lockheed reported third-quarter earnings of $7.97 per share on October 22, ahead of the roughly $7.52 analysts expected. 

Revenue rose 11% to $20.7 billion, and backlog reached a record $292 billion, including $52.5 billion tied to a multiyear award to produce PAC-3 interceptors. The stock jumped 7% that day even as the S&P 500 fell 1.2%.

Morgan Stanley on Monday upgraded Lockheed to Overweight from Equal-Weight, raising its price target to $835 from $690. It said a new F-35 production agreement significantly de-risks the stock. 

RTX Corp. (NYSE:RTX) and Northrop raised their 2026 profit outlooks. GE Aerospace (NYSE:GE) also lifted its guidance.

Rebound Follows Slump

The rebound in share prices follows a rough stretch for the defense sector. 

The iShares U.S. Aerospace & Defense ETF (BATS:ITA) closed at $207.76 on October 19, nearly 18% below its August 14 close. It closed at $209.74 on Friday.

In September, the State Street SPDR S&P Aerospace & Defense ETF (NYSE:XAR) logged the longest weekly losing streak in its history.

Even Northrop, among October’s leaders, trades about 28% below its 52-week high of $774 set in March. Its growth depends on the B-21 bomber and Sentinel intercontinental ballistic missile, the types of large strategic programs likely to face the most scrutiny in a budget fight. 

U.S. Midterm Impact

The upcoming midterm elections have weighed on defense stocks. The concern is that a Democratic win would threaten future growth rather than existing contracts. 

Polymarket puts Democrats’ chances of winning the House at about 95% and the Senate at about 71%. 

Bloomberg Intelligence analysts Will Lee and George Ferguson wrote on Friday that Democratic gains could reset fiscal 2027 defense spending toward 2026 levels and flatten growth through 2028.

Andrea Gabellone, head of global equities at KBC Securities, told Bloomberg that Democratic control of both chambers would give the party more room to coordinate funding negotiations, particularly in healthcare, clean energy and defense. 

President Donald Trump wants to lift annual defense spending from $1 trillion to $1.5 trillion, an increase that requires congressional approval. A stopgap funding measure runs until December 11, holding spending at last year’s level. 

Drone Makers Miss Out

Drone stocks have fared the worst. They are navigating formidable supply chain challenges and rapidly changing battlefield demands.

Investors also worry a Democratic Congress could squeeze funding for the Pentagon’s drone push.

A Congressional Research Service report updated October 5 lists 49 U.S. drones lost or damaged in operations against Iran since February 28, including 45 MQ-9 Reapers.

That has created real replacement demand, but listed companies aren’t the main beneficiaries. 

The Air Force is accelerating a successor program that targets 500 drones at about $10 million each by 2032. The seven companies reportedly competing, including General Atomics and Anduril, are all privately held.

Publicly Traded Drone Makers at Risk

That leaves publicly traded drone stocks exposed to funding risk without the backlog cushion of the large contractors.

The Pentagon is also more used to acquiring expensive submarines and fighter jets than cheap expendable drones.

AeroVironment Inc. (NASDAQ:AVAV) fell 6.5% on Friday, Kratos Defense & Security Solutions (NASDAQ:KTOS) dropped 5.7% and Red Cat Holdings Inc. (NASDAQ:RCAT) slid 8.3%.

All three trade 69% to 75% below their 52-week highs.

Investors Remain Cautious

Investors and analysts will remain cautious on smaller defense-tech names until there is more clarity on the fiscal 2027 budget. 

Byron Callan, managing partner at Capital Alpha Partners, said both parties support replenishing depleted missile stockpiles. He added that lawmakers may look harder at big-ticket programs such as the F-35 and Sentinel.

Analysts at Cantor Fitzgerald believe that protracted geopolitical conflicts will continue to drive demand for U.S. weapons. If Republicans hold their ground, JPMorgan sees L3Harris Technologies Inc., Lockheed Martin Corp. and Northrop Grumman Corp. as possible beneficiaries.

The question after Tuesday is whether a divided Washington cuts defense spending or simply redirects it toward the munitions the Iran war is using up.