Political Instability and Defense Sector Valuations: Navigating Separation of Powers and Executive Overreach Risks

The defense sector has long been a barometer for geopolitical tensions, but the interplay between political instability, executive overreach, and legislative dynamics has introduced new layers of complexity to its valuation dynamics. From 2020 to 2025, defense stocks have experienced unprecedented volatility, driven by both external conflicts and internal institutional clashes. This analysis examines how separation of powers disputes and executive interventions have shaped investment trends in the sector, drawing on recent case studies and policy shifts.

Geopolitical Tensions as a Catalyst for Defense Spending

Global defense spending surged to $2.443 trillion in 2023, a 6.8% increase and the highest level in recorded history, as conflicts like the Russia-Ukraine war and the Israel-Hamas conflict intensified demand for military equipment and services. In the U.S., defense spending grew by 28.5% from fiscal 2020 to the proposed fiscal 2025 budget, with the SPADE Defense Index rising 48% since the start of the Russia-Ukraine war. This surge has translated into historic backlogs and revenue growth for firms like Lockheed Martin and RTX, which reported significant gains in 2023. However, despite these gains, defense stocks remain undervalued relative to tech giants, with the combined FY23 revenues of Apple, Alphabet, and Microsoft exceeding the cumulative defense revenues of the Top 100 defense companies by 49.5%.

Executive Overreach and Market Volatility

Executive actions have introduced sharp volatility into defense sector valuations. In late 2025, President Donald Trump's executive order restricting dividends and buybacks for "underperforming" defense contractors triggered immediate declines in stocks like Raytheon Technologies (RTX) and Lockheed Martin, with some dropping nearly 10% in a single day. The order, which tied executive incentives to performance outcomes, reflected a broader trend of executive intervention to align defense contracting with national priorities. However, Trump's subsequent pledge to increase the U.S. military budget by 50%-from $901 billion to $1.5 trillion- spurred a sharp rebound in defense stocks, with European firms like BAE Systems also seeing gains. This episode underscores how executive overreach can create rapid, dramatic swings in market sentiment, even as long-term growth is fueled by geopolitical tensions.

Separation of Powers Conflicts and Legislative Influence

Legislative checks on executive power have further complicated defense sector dynamics. The proposed One Big Beautiful Bill Act (OBBBA) in 2026, which aims to boost U.S. defense spending by 15% to over $1 trillion, highlights the tension between congressional oversight and executive priorities. While such measures could add 0.2 percentage points to real GDP growth in 2026, capacity constraints in production and labor may limit their full impact. Additionally, conflicts of interest have emerged as lawmakers with ties to defense contractors, such as Sen. Susan Collins (R-Maine) and her spouse's holdings in Boeing and RTX, raise concerns about how budget decisions might influence stock valuations. Studies suggest that congressional leaders may achieve abnormal returns through strategic trading, leveraging political information to anticipate regulatory and legislative developments.

The Role of Legislative Reforms and Market Perception

Efforts to address these conflicts, such as the proposed End Trading and Holdings in Congressional Stocks (ETHICS) Act, aim to impose stricter penalties for non-compliance and require lawmakers to divest stocks. However, the existing STOCK Act has proven insufficient in curbing misconduct, as constitutional protections and weak enforcement mechanisms persist. Meanwhile, the Department of Government Efficiency (DOGE), proposed under Trump's administration, seeks to scrutinize defense spending for inefficiencies, potentially affecting large, underperforming programs. While DOGE lacks statutory authority to implement changes directly, its influence on public perception could pressure Congress to enact structural reforms.

Conclusion: Balancing Risk and Opportunity

The defense sector's valuation trajectory remains inextricably linked to political instability and institutional dynamics. While geopolitical tensions ensure sustained demand for military capabilities, executive overreach and separation of powers disputes introduce volatility that investors must navigate. The recent Trump-era examples illustrate how sudden policy shifts can drive both sharp declines and rebounds in stock prices, emphasizing the need for agility in portfolio management. As legislative reforms and fiscal constraints shape the sector's future, investors should monitor both global conflicts and domestic institutional clashes for signals of opportunity and risk.