A Mixed Morning Across the Defense Sector
The defense sector is presenting a notably mixed picture in current trading. Lockheed Martin is down only fractionally. Northrop Grumman, which has struggled badly throughout the year, is down about four-tenths of a percent on the session. On the positive side, GE is up about one and a half percent, and RTX is up roughly four-tenths of a percent. So while some names are gaining, the overall tone is uneven rather than uniformly weak.
Year to date, the divergence is stark. Northrop Grumman is down roughly 14%, making it the clear underperformer of the group, while Lockheed Martin has managed only marginal gains of about 2% in the other direction. These wide performance gaps between individual companies are one of the defining features of the sector right now.
What Is Driving the Weakness in Pure-Play Defense Names
Most of the pure-play defense companies — names like L3Harris, Lockheed Martin, and Northrop Grumman — have been suffering from several overlapping factors, and which factor matters most depends on the type of investor. More short-term-oriented investors simply do not see a lot of upside in 2026, which weighs on sentiment.
The overarching theme affecting defense stocks since earlier this year, however, is political. There is a widely held expectation that the midterm elections coming in November will go against the president, with Democrats potentially taking a majority in either the House or the Senate, or both. Such an outcome is viewed as unfavorable for defense spending, and specifically threatening to the roughly $1.5 trillion that the administration is requesting. The general multiple compression and the decline seen across these stocks since earlier in the year is largely attributable to these election-related and spending-outlook factors. Northrop Grumman is included in this dynamic.
The European Angle: Underinvestment and a Shift Toward Buying Local
International markets add another layer to the story. There was recent attention on Rheinmetall, the German defense company, which fell after Germany abandoned plans to build six warships. The question is how much this kind of headline is feeding into thinking about U.S. defense stocks and the broader level of commitment to defense spending.
The key point here is that, for quite some time — since late last year — the U.S. defense names have not been counted on for significant growth coming from international markets. The first development was that any growth in Europe was having more of an effect on European companies such as BAE Systems and Rheinmetall than on U.S. firms. Relative to U.S. stocks, Europe was not being counted on to deliver any incremental growth beyond the major existing programs that European nations already had with U.S. companies.
Two themes underpin this. The first is politics: Europe wants to buy more defense equipment from Europe, which limits the upside for American suppliers. The second, and arguably more important, theme is that Europe has fundamentally underinvested in defense for almost 40 years. A striking illustration of this is that the Royal Navy reportedly has more admirals than it has ships. Because of this long history of underinvestment, investors have been operating on the assumption that defense will not become a genuine priority in Europe.
Importantly, the data appears to support that view. Despite a great deal of rhetoric and many words spoken about increasing European defense commitment, there simply do not seem to be a lot of actual dollars or money being put toward it. This skeptical view — that European words are not being matched by European spending — is the perspective shared by a majority of U.S. investors, and it helps explain the significant performance gaps between individual companies.
A Sample Trade on Northrop Grumman
Northrop Grumman has been the most beaten-down name in the group and is now in bear-market territory. The stock is down over 35% from its all-time highs of about $774 reached just a couple of months earlier. This sharp pullback may represent an opportunity.
On the fundamentals, the company's backlog has risen to nearly $96 billion as of its last earnings report. The next earnings release is scheduled for July 21, which could serve as a catalyst to the upside. The Relative Strength Index (RSI) is approaching the 30 level, suggesting the stock may be oversold.
For an investor who believes the stock could reverse and move higher, a bullish call vertical was outlined to take a directional view while improving the probability of success on a high-priced stock. The structure gives some duration ahead of the earnings catalyst:
- Cycle and timing: Using the August monthly options cycle, which is about 53 days until expiration, giving nearly two months for the position to work.
- Long leg: Buy the August at-the-money 500 strike call.
- Short leg: Sell the August 550 strike call against the long 500 call. The 550 strike is placed roughly one standard deviation away — the option market is pricing in about plus or minus $50 in either direction for the August cycle.
- Cost and risk: This creates a bullish $50-wide call vertical at a debit of roughly $17.50, meaning the total risk is about $1,750.
- Potential profit: There is over $3,200 in potential profit if the stock gets back above the $550 level over the next 53 days.
- Break-even: The break-even is only about three and a half percent above the current share price, so a massive upside move is not required. Reaching the $550 line for maximum profit represents only about a 10% gain from current share price levels.
The overall logic of this approach is that on a high-priced, potentially oversold stock, a defined-risk call vertical lets a trader take a directional bias, give themselves better probabilities of success, and position to take advantage of a potential catalyst with earnings only a few weeks away.
