Shares in the U.S. defense sector have declined sharply in recent months amid growing investor expectations that the upcoming midterm elections will result in a Democratic sweep of Congress, potentially jeopardizing President Donald Trump’s plans for a substantial increase in military spending. Between early July and mid-October, the iShares US Aerospace and Defence ETF dropped by 16 percent, while the broader S&P 500 index rose 3.5 percent during the same period. Market data indicates that the likelihood of Democrats regaining control of both the House of Representatives and the Senate has increased by about 20 percent.

The defense industry’s stock performance appears closely linked to political developments, according to Robert Stallard, a defense analyst at Vertical Research Partners, noting that defense has historically been a bipartisan issue but has become more politically polarized under the Trump administration. Democrats are widely expected to secure a House majority, but they face significant challenges in their bid to win control of the Senate, where 35 seats are contested in the midterms.

Investor enthusiasm for defense stocks peaked earlier this year following Trump’s announcement of a proposed $500 billion increase in annual defense spending, aiming to expand the military budget from $1 trillion to $1.5 trillion. However, tensions between Defense Secretary Pete Hegseth and Congress, particularly over the administration’s approach to the conflict with Iran, have strained relations. Meanwhile, Democrats have pledged to reverse cuts to domestic programs, and concerns over inflation and rising Treasury yields have made lawmakers cautious about backing large increases in defense budgets.

Despite a global surge in defense expenditures prompted by conflicts such as those in Ukraine and the Middle East, major U.S. defense contractors have seen their shares fall throughout the year. Lockheed Martin, known for its Patriot missile system, has dropped more than 20 percent since March, while Northrop Grumman and L3Harris have declined by approximately 35 percent. These declines come even as companies grapple with production backlogs and increased demand for American missile systems.

Byron Callan, managing partner at Capital Alpha Partners, said defense executives initially anticipated that Republicans would secure funding for the proposed $500 billion boost. However, Democrats’ dissatisfaction with how some funding was allocated—and Hegseth’s refusal to provide detailed cost accounting related to the Iran conflict—have unsettled lawmakers. While bipartisan support exists for replenishing depleted missile stockpiles, questions remain about the scale of orders for major systems like F-35 fighter jets and Sentinel intercontinental ballistic missiles. Callan added that Democrats are unlikely to call for drastic defense spending cuts but are expected to weigh military budgets alongside increased domestic expenditure priorities.

Some market observers, such as Randy Gwirtzman of Baron Capital, argue that investors may be overestimating the political risks to defense spending, pointing out that smaller defense companies have seen even steeper declines than the industry’s major contractors. He dismissed the notion that a Democratic election victory would significantly damage the defense sector.

Stallard noted that high-profile projects associated directly with Trump, including a so-called “Golden Fleet” of battleships and a planned space-based weapons network dubbed the “Golden Dome,” could be at risk if Democrats take control, given their unconventional nature and expert skepticism.

In recent trading, select defense stocks have posted gains ahead of anticipated strong third-quarter earnings reports. The sector has also attracted investment as concerns over excessive spending in technology stocks, particularly in artificial intelligence, have encouraged portfolio shifts. Analysts emphasize that ongoing geopolitical instability will sustain global demand for U.S. defense products, with some experts suggesting that enduring conflicts may increase the likelihood of wider international confrontations, further bolstering defense firms’ prospects regardless of political changes in Washington.