Al Root

Wednesday trading in defense stocks illustrates what investors have to look forward to, and why valuation multiples are contracting.

Shares of major U.S. defense contractors fell sharply in late trading after The Washington Post reported that the Trump White House warned the Defense Department of budget cuts. The White House and Defense Department didn't immediately respond to requests for comment.

Shares of Lockheed Martin dropped about $7, or almost 2%, in response to the news. Shares recovered some, leaving them off about $2 from daily highs and up about 1%, at $432.95, on the day. The S&P 500 and Dow Jones Industrial Average added about 0.2%.

Shares of General Dynamics were up 0.7% at the close, while Northrop Grumman was down 1.8%, and L3Harris Technologies slipped 0.5%.

Shares might not be down more because the sector has already been hammered. Through late trading Wednesday, stocks of the four large defense contractors were down almost 20% since the Nov. 5 election.

The group now trades for an average of about 16 times estimated 2025 earnings, down from 18 times on Nov. 5.

Uncertainty about defense funding and Elon Musk's Department of Government Efficiency, or DOGE, which is looking for fraud and waste across the government, have weighed on investor sentiment.

Over the past 12 months, the U.S. spent more than $900 billion on defense, a figure that has grown about 5% a year for the past few years. What that number will look like in the future is hard to say right now, and investors don't like uncertainty.

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

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

February 19, 2025 16:39 ET (21:39 GMT)

Copyright (c) 2025 Dow Jones & Company, Inc.