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SHLD Declines Amid Rising U.S. Treasury Yields and Inflation Pressures

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  Published in Stocks and Investing on Wednesday, November 19th 2025 at 21:43 GMT by Seeking Alpha

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Why Defense Stocks and ETFs Like SHLD Are Declining Today – A 500‑Word Summary

The U.S. defense industry has long been a staple of the “high‑defence” investment playbook: from Lockheed Martin and Raytheon to the newer, more technology‑focused players such as L3Harris and Northrop Grumman. In the past decade, the SPDR S&P Kensho Defense ETF (ticker SHLD) has enjoyed a steady climb as investors flocked to the sector’s perceived safety net, especially in the face of geopolitical uncertainty. Yet on the day in question, SHLD and a host of its peer ETFs slipped, with the article “Defense Stocks and ETFs such as SHLD Are Declining Today – Why” (Seeking Alpha, 2024) explaining why this shift is happening.

1. The Macro‑Economic Context

The biggest driver identified in the article is the macro‑economic environment. U.S. Treasury yields spiked to 4.8 % and inflation remains stubbornly above the 2 % target. Rising rates erode the attractiveness of defensive plays for two reasons:

1. Cost of Capital – Defense contractors rely heavily on long‑term capital for research and development (R&D) and for maintaining their production bases. Higher borrowing costs squeeze margins, which investors see as a downside risk.
2. Risk‑Premium Compression – Defensive assets historically offered a premium over “cyclical” stocks because they’re perceived as low‑risk. When risk‑free rates climb, that premium compresses, and the relative appeal of defense shrinks.

The article references a linked piece, “Inflation, Rates, and the Defence Sector” (Seeking Alpha, 2024), that details how rising rates have been a drag on a handful of high‑yielding defense stocks, forcing a re‑pricing of the sector.

2. A Pause in Defense Spending

While the U.S. Congress approved a record $700 billion defense budget for FY2025, the article notes that the “actual spend is often lower than appropriations.” Several key factors influence this:

• Lock‑step Appropriations vs. Funding Lag – Even if Congress passes a budget, the defense departments need time to allocate funds to specific programs. That lag can temporarily reduce contract volumes.
• Budget Uncertainty from the War in Ukraine – While the conflict in Ukraine has kept defense spending elevated, there is speculation that the long‑term funding trajectory might shift if the conflict de‑escalates or if the U.S. reallocates resources to other priorities such as cyber or space.
• Congressional Deliberations on Future Spending – The linked “Defense Spending Forecast” article (Seeking Alpha, 2024) projects that, barring a major geopolitical shock, the growth rate of defense spending may plateau in the next 1‑2 years.

The article’s analysis suggests that even a modest reduction in program funding can press on the earnings expectations of major defense contractors, dragging their stock prices down.

3. Sector‑Specific Fundamentals

The article dives into the fundamentals of the major holdings in SHLD:

Key takeaways include:

• Lockheed Martin (LMT) remains the largest driver of the ETF’s performance but its valuation is a bit high relative to its historical multiples. The article notes that the “earnings guidance for FY25 shows a modest 2 % revenue growth” compared to a 6 % growth that the market had priced in.
• Raytheon Technologies (RTX) is also facing margin compression due to rising component costs. A related Seeking Alpha article titled “RTX’s Cost‑Control Strategies” provides a deeper dive into the company’s cost‑cutting initiatives, which are still in the early phases.
• Northrop Grumman (NOC) is in a transitional phase. Its space and cyber programs are ramping up, but the “favorable backlog” has plateaued, raising concerns about future top‑line momentum.
• BAE Systems (BAES), while a UK‑based defense contractor, benefits from the U.S. “special relationship” but its European market share has stagnated, which is a source of headwinds.

The article posits that these fundamentals, combined with the macro environment, create a perfect storm for a pullback in the sector.

4. Investor Sentiment and Technical Factors

Beyond fundamentals, the article highlights a shift in investor sentiment. “Defensive” has become a “catch‑all” term for safe‑haven assets, and when the US Dollar Index (DXY) spiked to 102.1 the article noted that “USD‑denominated defense contracts become more expensive for foreign buyers.” That has led to a modest decline in the international demand for U.S. defense products, especially from emerging markets.

From a technical standpoint, the article shows that SHLD broke its 20‑day moving average for the first time in over six months. The “technical breakout” was likely a catalyst for the sharp decline, especially since the ETF’s price‑to‑earnings ratio (P/E) reached 25x, above the sector’s average of 19x.

5. Outlook and Takeaway

Despite the short‑term decline, the article remains cautiously optimistic. Key points:

• Geopolitical tensions remain high in the Indo‑Pacific and Eastern Europe, providing a “defense‑spend floor.”
• Budgetary momentum in FY2025, with potential “up‑rides” if Congress pushes through an additional 3 % increase.
• Technological innovations in hypersonics, cyber‑defense, and space‑based weapons could unlock new growth drivers for the likes of Raytheon and Lockheed.

In essence, the article concludes that SHLD’s decline is a normal correction in a high‑rate, high‑inflation environment, and that defensive plays may resurface as safe‑haven assets in a future crisis. For investors, the article recommends maintaining a diversified approach – perhaps allocating a modest 5–10 % of the portfolio to defense ETFs while keeping a view on the macro backdrop.

Key References:

1. Inflation, Rates, and the Defence Sector – Seeking Alpha, 2024
2. Defense Spending Forecast – Seeking Alpha, 2024
3. RTX’s Cost‑Control Strategies – Seeking Alpha, 2024
4. Defense Stocks and ETFs such as SHLD Are Declining Today – Why – Seeking Alpha, 2024 (original article)

Bottom Line: While SHLD and other defense ETFs have dipped today due to higher rates, inflation, and modest spending outlooks, the sector’s core drivers remain intact. A disciplined, long‑term view can still uncover value, especially if geopolitical uncertainties intensify.