Al Root

Defense stocks fell Thursday as investors considered what a second Trump presidency means for defense contractors.

Change in and of itself wasn't what was troubling investors. The possible firing of several high-ranking Pentagon officials -- Gen. CQ Brown, chairman of the Joint Chiefs of Staff, is mentioned as one -- appears to be the catalyst.

In midday trading, Lockheed Martin, Northrop Grumman, General Dynamics, and L3Harris Technologies were down an average of almost 4%. The iShares U.S. Aerospace & Defense ETF was off 1.8%.

The drop comes after Wednesday's relatively muted reaction to President-elect Donald Trump's choice for defense secretary, which caught Wall Street analysts off guard. Trump said he would nominate Pete Hegseth, who is a veteran, an author, and contributor to Fox News.

The four defense contractors fell 0.7% on average, but the diversified ETF rose 0.4%.

William Blair analyst Louie DiPalma wrote Wednesday that he doesn't expect the trajectory of military spending to change much under the incoming administration. He is projecting low single-digit percentage annual increases.

The absolute level of U.S. military spending matters a lot for shares of defense contractors.

What appeared to be moving the stocks Thursday was word of the possible dismissals, which Reuters reported.

The Trump transition team didn't immediately respond to a request for comment.

Turnover adds uncertainty for investors. The impact on military budgets and contracts, however, is unclear.

The contractors didn't immediately respond to a request for comment.

Through midday trading, the contractor stocks were up about 15% year to date on average. The ETF was up 21%.

Write to Al Root at allen.root@dowjones.com

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November 14, 2024 13:15 ET (18:15 GMT)

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