📺 Netflix's dilemma

Defense Stocks Are Getting Hammered. Wall Street May Be Missing the Bigger Picture

The Pentagon's shopping spree is losing its charm on Wall Street. Despite record backlogs at defense contractors like Northrop GrummanNOC and RTXRTX, investors worry November's midterms could lead to military spending cuts in 2027. That prospect is weighing on stocks that have benefited from years of rising defense budgets.

Election odds: Wall Street has good reason to watch the Nov. 3 midterms closely. As of Oct. 20, Polymarket contracts put the implied probability of Democrats winning the House at 91.5%, compared with 64.5% for the Senate. Defense budgets could come under greater pressure (opens in a new tab) if Democrats take control, particularly for expensive projects still in development. For contractors, much depends on the weapons they produce and the contracts they've already secured.

• Northrop ended September with a record $109.6B backlog, though its Sentinel missile program could face closer scrutiny.
• RTX and Lockheed MartinLMT have backlogs of $340B and roughly $230B, respectively, supported by major missile contracts.

The Contracts Keep Coming

The latest earnings reports give investors another reason to reconsider the selloff. Northrop and RTX both raised their full-year forecasts, helped by new orders and stronger sales. More importantly, the companies are securing major weapons deals faster than they're delivering on existing ones. RTX's quarterly organic sales rose 12%, while Northrop's new contract awards reached 1.5x its quarterly revenue.

• RTX secured ~$37B in multiyear Tomahawk and AMRAAM missile contracts and raised its adjusted earnings outlook to $7.65–$7.75 per share.
• Northrop won $16.4B in quarterly awards, including $2B for Sentinel missiles and $1.4B for Virginia-class submarines.

Wall Street is split: Barclays initiated coverage of Northrop with a sell-equivalent rating, warning that defense budgets have more room to disappoint than exceed expectations. Vertical Research upgraded Lockheed to buy, citing bipartisan support for missile spending. Some fund managers have also been buying GE AerospaceGE and L3HarrisLHX during the pullback. Lockheed's Oct. 22 earnings will offer another look at the industry's health, although investors may have to wait until the next federal budget to see which programs face the greatest pressure.

Nvidia Secures $35B in China Chip Orders Despite US Export Restrictions

Export restrictions have done little to dent China's AI ambitions. ByteDance, AlibabaBABA, and TencentTCEHY have placed more than $35B in orders (opens in a new tab) for Nvidia'sNVDA workstation chips, which attracted little interest from Chinese buyers just last year. With demand for AI computing power outstripping supply, even lower-tier hardware has become a lucrative business.

• Nvidia has warned customers that deliveries aren't guaranteed, with buyers potentially receiving just 5% to 10% of the chips they've ordered.
• Chinese orders have already exceeded 6M cards, more than double the 3M units expected to be produced globally next year.

Production bottleneck: Meeting that demand won't be easy. Nvidia is expected to prioritize its next-generation Rubin chips in 2027, leaving less manufacturing capacity at Taiwan SemiconductorTSM for workstation cards. Chinese buyers also have limited alternatives, with domestic chipmakers still struggling to match American technology. For shareholders, the opportunity comes with a level of political uncertainty that's difficult to price.