What just happened to drone stocks
Drone-linked shares flipped from leaders to laggards as election risk filtered into prices. The BofA US Drone Ecosystem Index climbed by almost 120% between the end of 2024 and mid-January, boosted early on by reconciliation optimism, before dropping 40% through Tuesday even as the S&P 500 added 11%.
Some newly listed names show the whiplash. Military drone maker Aevex Corp. doubled over its first two trading days post-listing; nevertheless, shares have fallen 43% year-to-date.
Why reconciliation is the swing factor
The Pentagon's fiscal 2027 request totals 1.5 trillion dollars across discretionary and mandatory funds, with roughly 75 billion dollars aimed at drones and counter-drone tech. About 55 billion dollars of that - devoted to autonomous warfare development - sits in a reconciliation package that can be derailed if Republicans lose their majority in the House or the Senate.
"A Democratic sweep would certainly put the reconciliation proposal at risk," said Jefferies analyst Sheila Kahyaoglu, pointing to the fast-track process the Trump administration is using to push mandatory defense funding. Todd Harrison of the American Enterprise Institute warned that, because reconciliation would not be an option in the next Congress, "a lot of this drone funding may never happen." He noted Congress could still move some of the spending into the 2027 defense budget, but not as quickly or at the same scale as reconciliation. Interactive Brokers' chief strategist, Steve Sosnick, said that if control of Congress changes, it would "engender greater scrutiny about defense spending, and certainly not just rubber-stamp Defense Department requests." The implications for drone makers and suppliers are significant; without those resources, "that could be the end of them," Harrison said.
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How the thesis changed
The US has been racing to boost domestic drone output as unmanned systems take a bigger role in modern warfare, tied to continuing wars in the Middle East and Ukraine. That push stands to benefit companies such as Red Cat Holdings Inc., Unusual Machines Inc. and AeroVironment Inc. "Drone warfare is unquestionably changing the economics of modern defense," said Ivan Feinseth, CIO at Tigress Financial Partners.
But after a surge of enthusiasm for newer defense-tech names, investors are reworking expectations around procurement delays, higher capital costs and political risk, Feinseth said. Some see classic bubble traits. Even after the selloff, valuations sit well above the broader market and traditional defense primes, reflecting growth that may take years to show up, according to Feinseth.
Kratos Defense & Security Solutions is valued at 36 times forward earnings, while AeroVironment is at 27 times; both stocks are off by more than 45% this year. Ondas Inc. changes hands at 117 times forward earnings and is 53% below its Jan. 8 peak.
What it means for your portfolio
In plain English: the bull case depends on steady funding and faster procurement. Reconciliation puts a large slice of that on a political clock, and November's outcome will decide how much of the 55 billion dollars survives or gets reworked through regular budgeting. Some see opportunity after the drop - Maley argues the declines have made several names more attractive because "a lot of the election fear has already been priced in" - but the group's premium multiples and uncertain timelines explain why it has underperformed the market.
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