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U.S. Defense Giants Remain Attractive Despite 20% Sector Sell-off

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  Published in Stocks and Investing on Tuesday, December 16th 2025 at 7:24 GMT by CNBC

Investors Should Still Back U.S. Defense Giants, Even Amid a Sector Sell‑off
December 16, 2025 – CNBC

The U.S. defense sector has been in the spotlight recently, as a sharp sell‑off wiped out roughly 20 % of the combined market value of the world’s biggest military‑equipment makers over the past two months. Yet, a new CNBC analysis argues that the downturn offers a “buy‑the‑dip” opportunity for investors willing to stake a claim on the United States’ dominant defense firms.

1. What’s Behind the Sell‑off?

The article begins by outlining the key drivers behind the recent plunge. A combination of macro‑economic uncertainty, rising interest rates, and a wave of sell‑offs in high‑growth sectors spilled over into defense. The sector’s valuation, which had been buoyed by optimistic forecasts of new arms deals and technology upgrades, cooled as investors re‑examined risk‑adjusted returns.

A side‑by‑side chart (linked to CNBC’s own “Defense Index Performance” page) shows the U.S. defense ETF (USDR) dropping 16 % in the last 90 days, while the broader S&P 500 fell 8 %. The article points out that the sell‑off is not a sign of fundamental weakness but rather a reflection of market volatility.

2. U.S. vs. European Defense Giants

The piece then contrasts the U.S. and European defense landscapes. It notes that European firms such as BAE Systems (UK), Rheinmetall (Germany), and Airbus Defence & Space (France) have been hit harder in recent months. Their shares have fallen between 18 % and 24 %, and their price‑to‑earnings ratios have contracted sharply as investors discount future growth expectations.

In contrast, the leading U.S. firms—Lockheed Martin, Northrop Grumman, Raytheon Technologies, and General Dynamics—have maintained more robust earnings growth. A “US Defense Giants” heatmap (linked to CNBC’s “Top Defense Stocks” section) highlights how these companies have delivered double‑digit revenue increases in 2024, largely driven by long‑term contracts with the Department of Defense and allied forces.

The article underscores that U.S. companies benefit from a large domestic market, a sophisticated industrial base, and a history of securing high‑value contracts (e.g., the F‑35 joint strike fighter and the next‑generation cruise missile systems).

3. Why Investors Should Still Back U.S. Defense

Stable Government Contracts:
One of the main arguments is the certainty of U.S. government spending. The U.S. Department of Defense budget for 2026 is projected to hit $770 billion, up 3 % from 2025, according to a linked defense‑budget briefing. Lockheed Martin alone is slated to receive a $5.3 billion order for the new B‑21 Raider stealth bomber, and Northrop Grumman has secured a $4.7 billion contract for the A‑lance missile system.

Technology Edge:
The U.S. industry is at the forefront of cyber‑security, autonomous systems, and hypersonic technology. Analysts quoted in the article stress that the U.S. firms have invested heavily in R&D, with a 12 % year‑on‑year increase in capital expenditures. This technological lead translates into higher barriers to entry for competitors.

Diversification and Supply‑Chain Resilience:
U.S. defense firms have also diversified beyond traditional weapons systems. Lockheed Martin’s “Advanced Systems” division is expanding into space‑based surveillance, while Raytheon’s “Cyber” division is growing in response to the rising cyber‑warfare threat. The article cites a linked study on U.S. defense supply‑chain resilience that shows American firms have reduced dependence on foreign components.

Valuation Recovery Potential:
Even with the sell‑off, the article argues that U.S. defense stocks are still undervalued relative to long‑term peers. A comparison of forward P/E ratios (linked to CNBC’s “Defense Valuation” page) reveals that Lockheed Martin trades at 11.8× earnings, below the historical average of 13.2× for the sector. The author suggests that a 15 % price rebound would bring the valuation back into line with 2020 levels, offering attractive upside.

4. Risks and Caveats

The article does not shy away from the risks. One key concern is the political climate surrounding defense spending. While U.S. policy makers have historically been committed to defense budgets, the article notes that changes in administration or budget priorities could affect contract volumes. A linked opinion piece on “Defense Spending and Political Shifts” highlights past instances where defense budgets were cut in favor of domestic programs.

Another risk is the growing competition from European firms. The article links to a report on “European Defense Innovation” which details how companies like Rheinmetall are pushing into unmanned ground vehicles and advanced air‑defense systems. However, it argues that even if European firms gain market share, U.S. giants are well‑positioned to secure joint‑development contracts.

5. Bottom Line for Investors

In its closing paragraph, the CNBC article advises that, “Despite a painful sell‑off, U.S. defense giants remain structurally positioned to capture continued growth from both domestic and allied governments.” It recommends a phased approach: buying at the bottom of the swing, holding through short‑term volatility, and benefiting from long‑term defense spending trends.

For European investors, the article suggests a diversified approach—allocating a portion of the portfolio to U.S. defense stocks while keeping exposure to European peers for geographic balance. It also highlights that the U.S. defense sector’s performance is less correlated with broader equity markets, offering a degree of risk mitigation.

Key Takeaways

• The defense sector’s recent sell‑off reflects macro‑economic volatility, not a fundamental shift.
• U.S. defense giants are better positioned thanks to stable government contracts, advanced tech, and supply‑chain resilience.
• Valuation metrics show upside potential for U.S. defense stocks.
• Risks remain from political shifts and European competition, but are offset by long‑term demand.

The article concludes by urging investors to view the dip not as a crisis but as a buying opportunity, citing the steady pipeline of defense contracts and the continued strategic importance of defense in an uncertain global environment.