Why Northrop Grumman Stock Dropped Today
Key Points
Midterm election results last night put Democrats in control of both the U.S. Senate and House of Representatives.
Even before the election, the Pentagon was preparing to see its record $1.5 trillion defense budget request shaved down to $1.1 trillion.
Northrop Grumman stock looks overvalued without massive defense spending to save it.
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Well, the Midterm Elections 2026 are over, and a Blue Wave victory has arrived. So what does that mean for Northrop Grumman (NYSE:NOC) stock? Apparently, nothing good.
Shares of the major defense contractor slipped 3.7% through 10:05 a.m. ET Wednesday morning on no Northrop Grumman-specific news at all. No analysts have downgraded the stock (yet). No one's cut any price targets (also yet). But the stock's still down.
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So why is that?
Image source: Northrop Grumman.
So long, $1.5 trillion defense budget (we hardly knew ye)
President Donald Trump famously called for a $1.5 trillion fiscal year 2027 defense budget in the months leading up to November's election. Republicans' resounding defeat at the polls, however, makes it unlikely that a Democratic Congress hostile to the Iran war and possessing the power of the purse will give the President anything like that.
Even in the days leading up to the election, Politico was reporting on Pentagon plans to ratchet back their spending request from $1.5 trillion to $1.1 trillion. With Democratic votes in the U.S. Senate now outnumbering Republicans 54-44 (with two seats still to be decided), and the House of Representatives tilting blue 228-139 (with 68 seats not yet confirmed), it's going to be hard to get even that much through Congress.
What's next for Northrop Grumman stock
This doesn't necessarily make Northrop Grumman stock a sell, of course, but the case for calling Northrop stock a "buy" just got a lot harder to make. Although the stock may seem cheap at 18x earnings, shares of the defense giant are trading at an historically pricey 1.8x price-to-sales ratio. Plus, free cash flow at Northrop backs up to less than $0.63 for every $1 in reported earnings.
I think Northrop stock is more likely to go down than up from here.
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Rich Smith has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Northrop Grumman. The Motley Fool has a disclosure policy.
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