Bloomberg on Saturday reported that US defense contractors are facing growing challenges just a month into the new administration, as concerns mount over proposed policies that include significant military budget cuts. These concerns have left American defense firms trailing behind their European competitors, who are experiencing a surge in demand due to heightened defense spending in Europe.

The S&P 500 Aerospace and Defense Index is on track for its fourth consecutive week of decline, marking its longest losing streak in over a year. In contrast, European arms manufacturers have recorded their best week in 16 months as governments across Europe increase defense investments following the ongoing Russia-Ukraine conflict.

US policy shifts fuel EU defense spending

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The divergence in performance is largely attributed to political uncertainties in the US, while European countries are aggressively modernizing their defense capabilities. The situation is exacerbated by President Donald Trump's comments about potentially halving the US defense budget and Defense Secretary Pete Hegseth's plan to cut military spending projections by 8% over the next five years. Meanwhile, Elon Musk's public criticism of the F-35 fighter jets on X has further shaken investor confidence.

Read more: US skips F-35, F-16 flights at Aero India 2025 as Russia shows Su-57

According to Bloomberg Intelligence analyst Will Lee, "US investors are hesitant to show any real conviction toward the group" amid this uncertainty. This has led to significant losses for major US defense companies, with Lockheed Martin Corp. and General Dynamics Corp. down 19% and 13%, respectively, over the past three months. Northrop Grumman Corp. is also facing its worst month in two years.

The sector's struggles are compounded by weak earnings projections and a lack of clarity surrounding the new administration's defense policies, particularly the strategic direction of the Department of Government Efficiency (DOGE).

Despite the current downturn, some analysts believe the sector could soon rebound. RBC Capital Markets' Ken Herbert suggests that while certain defense budget segments may be safeguarded, the prevailing uncertainty will likely continue to weigh on stock performance. However, he also noted that "now could be the perfect time to snap up shares with defense sentiment bottoming and primes trading at what has historically been a 'buying opportunity.'"

Bloomberg Intelligence's Lee remains cautiously optimistic, stating that "US defense primes will figure out how to align their portfolio to Trump administration priorities if they're not already."