"Blue Congress" Shocks Defense and Military Industry Trades! European Defense Stocks Plunge as Rearmament Narrative Faces Major Test

"Blue Congress" Shocks Defense and Military Industry Trades! European Defense Stocks Plunge as Rearmament Narrative Faces Major Test European defense stocks fell on Wednesday after the U.S. Democratic Party's election sweep dealt a blow to investors' optimism about deregulation and stimulus-driven economic growth. The day's market structure also highlighted policy rotation, with the European Stoxx 600 rising nearly 1%, led by banks and clean energy sectors, while military stocks clearly lagged. Capital is being reallocated to bets on different Democratic policy beneficiary paths and directions under the backdrop of a Democratic sweep of Congress. The European defense and military industry sector fell sharply, mainly because the Democratic Party's landslide victory in the midterm elections undermined market expectations for a further substantial increase in U.S. military spending. A basket of European military stocks compiled by Goldman Sachs Group fell as much as 4.1% on Wednesday, the largest drop in more than four months. Britain's BAE Systems, which derives nearly half of its revenue from the U.S. market, fell as much as 5.9%, making it the hardest-hit name. Mwb Research analyst Jens-Peter Rieker said in an emailed comment that the election results also eliminated "concerns that the U.S. would completely abandon the defense of European allies," a concern that had been one of the factors driving the sector's gains in 2025. Last year, under U.S. President Donald Trump, the United States scaled back its security commitments to Europe, prompting European governments to begin sharply increasing defense spending, and European defense stocks rose substantially as a result. As shown in the chart above, European defense stocks have pulled back since hitting a record high in January valuation concerns and order cancellations have stalled the rally in European military stocks. However, Alessandro Pozzi, a senior portfolio manager at Mediobanca, believes that given polls and prediction markets had been pointing to a Democratic sweep for weeks, the European market's reaction to the election news was somewhat surprising. Pozzi wrote: "Key air defense and missile defense programs, the 'Golden Dome' plan and shipbuilding have broad bipartisan support, although funding arrangements still depend on political discussions." Rieker believes the midterm election results are "slightly negative for market sentiment toward German defense stocks"; shares of Hensoldt, Rheinmetall and Renk Group could see greater volatility when they report third-quarter results on Thursday. "Blue Congress" Pushes Down Expectations for Military Spending Expansion The Democratic Party's sweep of both chambers of Congress in the U.S. midterm elections has led the market to reassess the feasibility of Trump further substantially increasing military spending, and has also weakened the trading logic that "the U.S. is scaling back its European security commitments, forcing Europe to accelerate its military buildup." "Blue Congress" refers to the Democratic Party controlling both the Senate and the House of Representatives. However, this adjustment first hit the military spending increment and policy premium that investors had priced in advance; subsequent earnings impact will still need to be reflected through budget appropriations and procurement progress. U.S. military spending expectations are the most direct transmission channel. Trump's proposed $1.5 trillion defense spending plan for fiscal year 2027 has not yet been approved, and with the Democratic Party controlling Congress, budget negotiations, project oversight and funding allocation could all face stronger constraints. For European contractors with a relatively high share of U.S. business, expectations for the pace of approval of new projects and procurement scale will accordingly face adjustment. Dow Jones reports showed that Lockheed Martin, Northrop Grumman and RTX also fell more than 2% in premarket trading that day, enough to show that the selloff spanned European and American military enterprises. European military stocks also face a second layer of valuation pressure. The 2025 rally was built on expectations that Europe would fill security gaps and expand independent defense capabilities; after the January high this year, valuation concerns and order cancellations have already weighed on the market. Mwb Research analyst Jens-Peter Rieker believes the Democratic victory eased market concerns that the U.S. would "abandon Europe." Under this judgment, investors will reduce the probability weighting of a scenario in which Europe is forced into emergency military expansion, thereby cutting the valuation premium they were previously willing to pay. However, these are all reassessments of the policy outlook, not an announcement that Europe has cut military spending. Rearmament Demand Still Supported; Order Fulfillment to Determine Next Round of Divergence European defense building is still supported by a multi-year policy framework. The NATO Hague Summit committed to raising defense and related security spending to 5% of GDP by 2035, including at least 3.5% for core defense spending and up to 1.5% for related infrastructure and security investment. These commitments need to be implemented through member states' annual budgets, and a change in control of the U.S. Congress will not directly revoke European procurement arrangements. Mediobanca analyst Alessandro Pozzi also pointed out that key air defense and missile defense programs, the "Golden Dome" plan and shipbuilding still enjoy relatively broad bipartisan support in the United States. Therefore, the main change facing military enterprises is that the scale, structure and implementation speed of new budgets will be harder to win unconditional market recognition. Company-level data show that order growth and execution risk are simultaneously affecting valuations. Defense sensor supplier Hensoldt's new orders in the first half reached EUR2.812 billion, up 100.1% year on year, with an order backlog of EUR10.356 billion, showing that European procurement demand has already entered the contract stage. On the other hand, Rheinmetall disclosed in August that the cancellation of the F126 frigate project is expected to affect revenue by up to EUR300 million in 2026, with the project background involving delays, cost overruns and other issues. Military spending expansion does not guarantee the smooth delivery of every project; companies must convert orders into acceptable equipment and actual cash collection. The next round of pricing will quickly return to earnings reports. Hensoldt, Rheinmetall and Renk all plan to release quarterly results on November 5. Key points to watch include whether new orders can cover delivery consumption, whether capacity expansion improves profit margins, and whether inventory buildup and construction investment can be offset by customer advance payments and delivery collections. Pozzi was surprised by the post-election decline and also reminded of an important fact: the Democratic sweep had already been widely expected by polls and prediction markets. Next, incremental information capable of supporting a share price recovery is more likely to come from companies raising profit and cash flow expectations, rather than repeating the rearmament theme again.