The recent decline in U.S. defense stocks has prompted many investors to consider buying, but experts at Bernstein advise against rushing into anything. In their view, the sector needs a pause at least until the midterm elections in November, as those elections could be the very trigger that reverses the trend toward growth.
From a Premium to a Deep Discount
As Bernstein analyst Douglas Harned explains, U.S. defense sector stocks began a protracted decline immediately after tensions with Iran escalated. Market sentiment shifted very sharply.
While in February, stocks in the sector were trading at a 15 percent premium to the S&P 500 index (everyone was discussing the massive $1.5 trillion defense budget proposed by Trump), the situation is now the opposite. Due to the protracted budget disputes on Capitol Hill, these stocks are trading at a 12 percent discount to the market.
Harned acknowledges that the decline has turned out to be much deeper than expected. Although he had previously doubted that geopolitical tensions would quickly translate into actual corporate profits, the current decline has been unexpectedly sharp.
The Budget Impasse in Washington
The main problem right now is the paralysis of the budget process. Neither the Senate nor the House of Representatives has been able to agree on a comprehensive appropriations bill, and members of Congress have already left for their pre-election recess.
Analysts view the extension of temporary funding through December 11 as even worse news than previous delays. Here’s why:
First, budget caps are effectively frozen at 2026 levels, which hinders the launch of new programs.
Second, the most critical areas—such as tactical missile systems and missile defense systems, whose stockpiles are already running low—are taking a hit.
When can we expect an entry point?
That said, Bernstein does not share concerns that a Democratic victory will lead to cuts in defense spending. Statistics from previous years suggest this is not the case. On the contrary, the defense investment budget is expected to grow by more than 10% by 2027, which will give the sector a powerful boost.
According to Harned, the November 3 election will be a pivotal moment. Most likely, that will be the best time to open long positions. For now, analysts advise investors to be patient and not try to buy into the current correction too early.