US Midterms Hit One Class of Stocks the Hardest as Trump Mulls Hegseth Removal

Defense stocks posted Wall Street’s steepest losses on Wednesday after Democrats won both chambers of Congress. Lockheed Martin dropped about 7% as investors priced in a smaller Pentagon budget than President Donald Trump wants.

Meanwhile, reports indicate that Trump is asking advisers whether Defense Secretary Pete Hegseth should keep his job.

Why a Democratic Congress Threatens Defense Contractor Revenue

Congress, not the White House, sets how much the Pentagon can spend. Contractors such as Lockheed, maker of the F-35 fighter jet, are paid out of that budget.

Trump asked for $1.5 trillion for 2027, against the $901 billion currently approved. Jefferies analysts expect a figure closer to the House’s roughly $1.15 trillion plan.

L3Harris fell nearly 8% and RTX more than 4% in morning trade. By early afternoon, Lockheed was down 7.45% and Northrop Grumman 4.64%.

That came during a broader stock market rally. Palantir, the AI software firm with big Pentagon contracts, fell below $171.

Will Hegseth Survive the Midterm Fallout?

Trump has made no decision, CBS reported. One source said Florida Gov. Ron DeSantis is being floated as a replacement.

Trump has been asking advisers whether Defense Sec. Pete Hegseth should remain in his role following Republicans' major midterm losses, CBS News reports.No decision has been madeBut Florida Gov. Ron DeSantis is being floated as a possible replacement, according to one source. pic.twitter.com/tesOFHNJGJ

— Wall St Engine (@wallstengine) November 4, 2026

Vice President JD Vance tied the defeat directly to the Iran war’s rising cost.

“The reason we lost is the war,” Vance wrote, listing three other contributing factors.

White House spokeswoman Anna Kelly countered that Trump backs his defense chief.

“…has full confidence in Secretary Hegseth.”

On Polymarket, a prediction market, the implied odds of Hegseth leaving by December 31 rose 25 points to 42%.

Meanwhile, others see a 32% chance he exits by the end of November, Polymarket data shows.

What Could Limit the Damage for Defense Stocks

Not every dollar is at risk. Defense shares jumped in January when Trump first floated $1.5 trillion, then gave back most of those gains before the vote.

A budget vote is also unlikely before 2027. Contractors still hold signed stockpile-replenishment deals that Congress has yet to fund.

CBS sources also said the new majorities make a Democratic push to impeach Hegseth more likely. For defense investors, both the next Pentagon chief and the 2027 budget now pass through a Democratic Congress.