Blair Downgrades Five in Defense Services Over DOGE Uncertainty

The defense sector is bracing for turbulence in 2025 as Goldman Sachs downgraded key players and reiterated a bearish outlook on other defense stocks, citing risks tied to a slowing Pentagon budget and margin pressures. The defense budget, which has more than doubled over the past decade, could see deceleration or even contraction under the watch of Donald Trump's newly formed Department of Government Efficiency (DOGE) led by Elon Musk and Vivek Ramaswamy. Goldman Sachs analyst Noah Poponak warned that defense spending may have peaked, creating "tough compares" for future growth.

Goldman downgraded General Dynamics Corp. (NYSE:GD) from Neutral to Sell, citing fundamental challenges across all four of its business segments. The analyst highlighted risks related to the F-35 program, which has already been named as a potential target by DOGE leadership. Lockheed Martin (NYSE:LMT), often seen as the bellwether of the defense industry, also remains on the Sell list from Goldman Sachs. Northrop Grumman (NYSE:NOC) holds a similar Sell rating, with concerns about slowing growth in its flagship B-21 bomber program. Huntington Ingalls Industries Inc. (NYSE:HII) is also struggling under margin pressures, with its shipbuilding business plagued by labor shortages and cost overruns.

The downgrades reflect the market's perception of the potential impact of DOGE's reforms on the defense sector. The decelerating and potentially negative growth in the forward U.S. Department of Defense budget, along with structural margin pressures and valuation risks, have led investors to become cautious about the defense sector's prospects. Despite these challenges, defense stocks as a group continue to trade above their historical valuation averages, making them vulnerable to a "de-rating" if the budget flattens or falls.

DOGE's proposed reforms are likely to affect the fundamentals of defense services companies in several ways, potentially influencing their long-term earnings prospects. Defense budget cuts, shifts in procurement practices, increased scrutiny and transparency, potential disruption in data systems and contracts, and impacts on key programs could all contribute to changes in the earnings prospects of defense services companies.



In a DOGE-driven environment, where defense spending may flatten or even fall, the current premium valuations of defense stocks could be unsustainable. If the defense budget is reduced, it could lead to lower top-line growth for defense contractors, which could in turn negatively impact their earnings and stock prices. Investors should closely monitor the developments surrounding DOGE's reforms and their potential impact on the defense sector's earnings prospects.

As the defense sector braces for uncertainty, investors should remain vigilant and consider the potential implications of DOGE's reforms on their portfolios. The market's perception of the risks and opportunities presented by DOGE's influence on defense spending will continue to shape the performance of defense stocks in the coming months and years.