After two red-hot years, defense and aerospace stocks hit an air pocket. From an early-August high through Wednesday, the S&P 1500 Aerospace and Defense Index dropped nearly 19%. Lockheed Martin Corp. and Northrop Grumman Corp. both fell by double digits over that stretch. GE Aerospace lost 19% as costlier fuel raised questions about how attractive flying will be, and a Bloomberg chart showed the group recently notched its lowest close since December.
Thursday's open was choppy, with the sector gauge flipping between small gains and losses. Big primes like Lockheed and Northrop edged higher early on.
Two worries have been front and center: Washington politics and jet fuel. Some investors are bracing for Democrats to gain ground in November, which could invite tighter scrutiny of defense budgets and of some Pentagon suppliers' ties to the Trump administration. Rising fuel prices also dull the outlook for commercial aerospace because expensive tickets can cool travel demand.
Others see bargain tags. "This would be the worst time to ever consider any meaningful cuts in defense spending," said Eric Clark, manager of the Alpha Brands Consumption Leaders ETF, citing elevated geopolitical risk, thinned US munitions stockpiles, and the need to upgrade technology. He also noted travelers are still paying up for flights. Clark's fund boosted stakes over the past month in GE Aerospace (with the formal name General Electric Co.), Lockheed, Northrop, and L3Harris Technologies Inc., arguing the group has been overshadowed by the AI trade that now looks shakier.
Infrastructure Capital Advisors bought Lockheed shares in mid-September that came to roughly 1% of its Equity Income ETF, CEO Jay Hatfield said. That position has since grown to about 3% of the portfolio, and the firm sells calls on Lockheed to generate income while it waits for a recovery. Hatfield expects a "wipeout" for Republicans in November, but called Lockheed's decline "irrational," saying Democrats would still back spending on defensive missiles.
Citigroup's John Godyn highlighted the weakness as a chance to get selective, placing catalyst watches on RTX Corp. and Huntington Ingalls. "Both aerospace and defense have simultaneously experienced major pullbacks and, while 3Q26 is set up to be a volatile EPS season, we think that we are close enough to a major tactical bottom in many stocks we cover to again advocate for buying the dip selectively," he wrote this month.
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Others are tilting toward different corners of the industry. Joe Gilbert at Integrity Asset Management added Navy shipbuilder Huntington Ingalls Industries Inc. and business-jet maker Textron Inc., saying "these verticals are more insulated from funding pressures, providing a catalyst." Vertical Research shifted Lockheed to a buy rating, citing cross-party backing for outlays on missiles. In a note, Robert Stallard, an analyst, said US defense equities are now more politically sensitive than in earlier years, though "a lot of 'bad news' is priced in."
This year's slide follows a two-year sprint. Investors piled into the space on the view that the US, the European Union and others would step up military budgets in a shakier world, while global travel was projected to climb. The result: the sector's index jumped more than 60% across 2024 and 2025, outpacing the S&P 500's 44% and the Nasdaq 100's 50%.
Not everyone is ready to buy the dip. Barclays recently initiated Northrop with a rating tantamount to sell, warning there is more room for US defense outlays to fall than rise, after years of growth. Analyst Anthony Valentini also noted that a presidential election is looming on top of the midterms.
Lockheed's meaningful exposure to missile demand earned only a hold-equivalent at the bank. Still, Barclays has described aerospace and defense as sitting at a turning point.
Longer-term drivers have not disappeared. Ongoing wars in Ukraine and Iran have underscored the need for new kit, including drones and lower cost air defense interceptors. Greater volatility simply reflects higher growth hopes, said Mark Malek, chief investment officer at Siebert Financial. He described his positioning as "broad but light" and said, "I still like the middle and longer-term prospects and suspect that we will start to get some grounding back once the midterms are over." The sector's earlier surge "driven by multiple expansion was real and justified given the changing face of demand and technology," he added.
Two things can be true at once: the group rallied hard in 2024 and 2025, and now politics and pricier fuel have knocked nearly a fifth off the index. Some managers are adding to names like GE Aerospace, Lockheed, Northrop, L3Harris, Huntington Ingalls and Textron, even using call writing to get paid while waiting. Others are waving caution flags ahead of a volatile 3Q26 earnings season and an election-heavy calendar. If you track this space, expect more bumpiness as headlines tug between budget fears and a still-strong case for modernization.
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