Al Root

President Donald Trump is sending Elon Musk's DOGE to the Pentagon. That has investors nervous.

Trump, speaking at a press conference with Japanese Prime Minister Shigeru Ishiba on Friday, said employees from the Department of Government Efficiency, headed by Tesla CEO Musk, would be heading to the Pentagon in an effort to root out wasteful spending.

Shares of large defense contractors fell after the comments. Lockheed Martin stock was down 0.6% in afternoon trading at $445.66, losing about $3 after the comments. Northrop Grumman stock was still up about 0.5% for the day at $468.83, but dropped about $5 following the comments.

Shares of L3Harris Technologies and General Dynamics were down about 0.3% and 0.1%, respectively, both near the lows of the day. The S&P 500 and Dow Jones Industrial Average were down about 1%.

The best explanation for the drop is added uncertainty. DOGE shouldn't have the power to cancel contracts or alter budgets. Based on Trump's comments, DOGE will be looking to ensure payments and contracts are benefiting the military as intended.

Exactly what could happen, however, is anyone's guess. DOGE is new and its operations have surprised many so far.

Tesla investors look surprised, too. Tesla stock was down 3.2% at $362.27, also at its lows of the day, following Trump's remarks.

Overall, defense spending should remain strong under Trump. Defense Secretary Pete Hegseth said in his confirmation hearings that 3% of U.S. GDP spent on defense was reasonable. That implies roughly $1 trillion a year -- similar to current spending levels.

The question for investors is how that money gets spent and how disruptive the new administration -- and DOGE -- is to the industry.

Since the election, Lockheed stock is down about 18%. L3Harris and General Dynamics shares are down about 18% and 14%, respectively. Northrop shares are down about 9%.

One reason Lockheed has been the weakest is that Musk has been critical of the F-35 fighter jet program. That's also one of the largest programs in the Defense Department and accounts for about one-quarter of Lockheed's sales.

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

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February 07, 2025 15:51 ET (20:51 GMT)

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