Defense stocks lead losses after Democratic sweep; Trump weighs Hegseth's future

On Wednesday, defense shares suffered the biggest declines on Wall Street following the Democratic victory in both congressional chambers. Lockheed Martin fell roughly 7% as market participants anticipated a lower Pentagon budget than what President Donald Trump had sought.

Separately, reports suggest Trump has been consulting advisers on whether to retain Defense Secretary Pete Hegseth.

Why a Democratic Congress Threatens Defense Contractor Revenue

It is Congress that determines Pentagon spending levels, not the White House. The budget pays companies like Lockheed, which manufactures the F-35 fighter jet.

Trump requested $1.5 trillion for 2027, compared with the existing $901 billion authorization. Jefferies analysts predict a number nearer to the House's approximately $1.15 trillion proposal.

During morning trading, L3Harris dropped roughly 8% and RTX lost more than 4%. By early afternoon, Lockheed had fallen 7.45% and Northrop Grumman 4.64%.

This occurred amid an overall market upswing. Palantir, the AI-focused company that holds substantial Pentagon contracts, dipped under $171.

Will Hegseth Survive the Midterm Fallout?

According to CBS News, Trump has not reached a decision. One unnamed source indicated that Florida Governor Ron DeSantis is being considered as a potential successor.

Trump has been asking advisers whether Defense Sec. Pete Hegseth should remain in his role following Republicans' major midterm losses, CBS News reports.

No decision has been made

But Florida Gov. Ron DeSantis is being floated as a possible replacement, according to one source.

Vice President JD Vance linked the electoral loss directly to the escalating expense of the Iran war.

“The reason we lost is the war,” Vance wrote, listing three additional factors.

In response, White House spokeswoman Anna Kelly stated that Trump supports his defense secretary.

“…has full confidence in Secretary Hegseth.”

On the prediction platform Polymarket, the probability of Hegseth departing by December 31 increased by 25 percentage points to 42%.

Separate Polymarket data indicates a 32% likelihood that he leaves before December 1.

What Could Limit the Damage for Defense Stocks

Some spending is not in jeopardy. Defense stocks climbed in January after Trump initially proposed $1.5 trillion, but surrendered most of those advances ahead of the election.

A budget vote is improbable before 2027. Contractors still have signed agreements for replenishing stockpiles that Congress has not yet funded.

Sources at CBS also indicated that the new Democratic majority raises the possibility of an impeachment effort against Hegseth. For those invested in defense, both the future Pentagon leader and the 2027 budget now require approval by a Democratic Congress.