Al Root
The selloff in defense stocks has gotten out of hand, from the perspective of Citi analyst John Godyn.
Shares of Lockheed Martin, Northrop Grumman, General Dynamics, RTX, and L3Harris Technologies are down 14% since the Iran war started and 8% since Monday.
And this week's losses are despite Northrop and Lockheed reiterating full-year financial guidance on earnings calls, and RTX raising its outlook for the year.
"In just a few weeks, the top-down narrative on defense stocks has completely flip-flopped," wrote Godyn on Thursday.
That narrative was built on higher military spending in the U.S. and Europe, driving faster sales and earnings growth -- justifying share gains and valuation increases. RTX stock, for instance, trades for about 25 times earnings expected over the coming 12 months. A year ago, it traded for closer to 20 times.
"The root cause of the selloff is the simultaneous release of an unusually large defense budget request with a spike in 'blue wave' risks stemming from President Trump's low approval ratings driving 'peak defense' fears," added Godyn.
The blue wave Godyn referred to would be significant gains by Democrats in this year's midterm elections, especially in the House and Senate.
As for U.S. military spending, Trump requested about $1.5 trillion for the Pentagon in fiscal 2027 -- a record -- and up about 50% from fiscal 2026.
"Where is your upside to a +50% annual DoD budget request, with an unexpected military conflict on top?" asked Vertical Research Partners analyst Rob Stallard in a Tuesday report, after GE Aerospace and RTX earnings. "Similarly in Europe, there continue to be periodic concerns over the impact of 'peace in Ukraine' and what that could do to the regional military spending trajectory..."
Regardless of whether Democrats win big in November, Godyn stands firm that both parties can work out a budget agreement -- and that defense manufacturers can thrive,
"Blue Wave or not, we continue to believe that the defense stocks in our coverage that are well-aligned with bipartisan budget priorities can sustain elevated revenue growth rates for some time and that the recent pullback has reached tactical extremes," wrote Godyn.
He rates shares of Northrop, RTX, and L3Harris Buy. He rates Northrop and General Dynamics stocks Hold.
Those ratings align with his peers. More than half of the analysts covering his three Buy-rated names rate shares Buy. Overall, 59% of analysts covering RTX rate its shares Buy. The average Buy-rating ratio for stocks in the S&P 500 typically ranges from 55% to 60%. The Buy-rating ratios for Northrop and L3 are 54% and 68%, respectively.
The Buy-rating ratios for Lockheed and General Dynamics are lower at 33% and 50%, respectively.
The five trade for an average of about 22 times earnings expected over the coming 12 months. A year ago, the average multiple was about 18 times.
While all five stocks are more expensive than a year ago, there still appears to be an opportunity to buy the dip in Wall Street's more popular names.
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
April 24, 2026 11:14 ET (15:14 GMT)
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