Defense Stocks Under Pressure as Tariffs and Operational Challenges Weigh on Profits

The defense sector, long a bastion of stability for investors, faced turbulence in early 2025 as major players issued stark profit warnings. Northrop Grumman, RTX (Raytheon Technologies), and Lockheed Martin all grappled with headwinds ranging from escalating tariffs to supply chain bottlenecks, triggering declines in their stock prices. Yet beneath the short-term volatility, the sector’s long-term fundamentals remain anchored by robust global defense spending and technological innovation. Here’s how investors should navigate this landscape.

Profit Warnings Highlight Near-Term Risks

Northrop Grumman kicked off the sector’s challenges by slashing its 2025 earnings guidance to $24.95–$25.35 per share, down from a prior range of $27.85–$28.25. The cut reflected lower sales in its space programs and manufacturing disruptions, with inflation and labor costs further squeezing margins. Shares plummeted 12% to $466.81, signaling investor skepticism about its ability to manage operational complexities.

RTX, meanwhile, delivered a mixed bag. While it beat Q1 earnings expectations with adjusted EPS of $1.47 and 5% revenue growth to $20.3 billion, its stock dropped 8.86% to $114.95 as investors fixated on a potential $850 million annual profit hit from global tariffs. The company cited U.S. tariffs on Mexico, Canada, and China, plus reciprocal measures, as the primary threat. To mitigate this, RTX plans a $2 billion investment in domestic manufacturing and is exploring duty drawbacks and supplier diversification.

Lockheed Martin, the F-35 jet manufacturer, reported solid revenue growth (4.5% to $17.96 billion) but faced headwinds from delays in upgrading the fighter’s electronic systems. Shares dipped 3% to $444.84, reflecting sector-wide tariff concerns.

Stock Market Reactions and Sector Dynamics

The broader defense sector mirrored the struggles of its leaders. Northrop’s 12% decline, RTX’s 9% drop, and Lockheed’s 3% slide underscored investor anxiety. Yet outliers like GE Aerospace (+3%) and Palantir Technologies (+2%) gained traction, likely due to their roles in cutting-edge defense tech and supply chain solutions.

Tariffs: The Elephant in the Boardroom

RTX’s warning crystallized the sector’s vulnerability to trade policy. The company now excludes tariff impacts from its official guidance, a stark acknowledgment of the risk. The U.S. defense sector’s $12 billion annual trade surplus relies on seamless global supply chains, now strained by protectionist measures. Northrop, too, flagged tariffs as a key concern, alongside budget uncertainties in Washington.

Long-Term Resilience Amid Short-Term Pain

Despite the headwinds, the defense sector’s backbone remains intact. RTX’s $217 billion backlog—split between $125 billion in commercial and $92 billion in defense orders—reflects enduring demand. European allies, bolstered by a $850 billion defense spending pledge over four years, are ramping up purchases of systems like Patriot missiles and F-35 jets. Additionally, U.S. President Trump’s proposed easing of military export rules could further boost Lockheed’s prospects.

Companies are also doubling down on operational improvements. RTX’s Collins unit reduced overdue line items in its supply chain by 20%, while Lockheed aims to finalize F-35 upgrades to avoid delays. RTX’s GTF Advantage engine certification and Northrop’s focus on space systems highlight bets on innovation to drive future growth.

Investor Takeaway: Focus on Resilience and Strategy

The defense sector is at an inflection point. Near-term profits face pressure from tariffs and supply chain frictions, but long-term demand is fortified by geopolitical tensions and modernization drives. Investors should prioritize firms with strong backlogs, diversified supply chains, and exposure to high-demand programs like the F-35.

RTX, despite its tariff struggles, boasts the largest backlog and is making strategic investments to insulate itself. Lockheed’s F-35 dominance and ties to global defense modernization also merit attention. Conversely, Northrop’s space program missteps and margin pressures warrant caution unless operational improvements materialize.

Conclusion

The Q1 2025 results underscore a defense sector caught between immediate turbulence and long-term opportunity. While tariffs and operational hiccups have spooked investors, the $850 billion European defense pledge, U.S. export reforms, and $217 billion backlogs at firms like RTX suggest a resilient trajectory. Investors who focus on companies with disciplined execution and exposure to critical programs—while hedging against tariff risks—can position themselves for gains as the sector navigates these challenges. The defense story remains one of strategic importance; it’s just getting a bit bumpier for now.