The Iran war should have been a tailwind for defense stocks. Instead, the sector is living through the longest losing streak in its history.
The State Street SPDR S&P Aerospace & Defense ETF (NYSE: XAR) has closed lower for six straight weeks. The seventh week is going the same way so far.
The fund fell 2.2% on Monday and was only 0.3% higher during Tuesday trading.
If the week ends in the red, XAR will have fallen for seven weeks in a row. That has never happened since the fund launched in 2011. Before this run, its longest weekly losing streak was five.
The iShares U.S. Aerospace & Defense ETF (BATS: ITA) and the Invesco Aerospace & Defense ETF (NYSE: PPA) show a similar pattern, with six straight weekly losses and declines of 17.4% and 15.6% since Aug. 14.
From Record High to Bear Market
The slide started at a record. XAR closed at $296.73 on Aug. 14, up 23% for the year.
Today the fund sits 21% below that peak. A drop of 20% from a high is the usual definition of a bear market.
The entire 2026 gain is gone. XAR is now down 2.9% year to date. Over the same period, the SPDR S&P 500 ETF Trust (NYSE: SPY) is up 12.3%.
The first week did the most damage. XAR lost 8.1% in the week of Aug. 17. That was its steepest weekly drop since the tariff shock of early April 2025.
Only Two Streaks Came Close
The fund had fallen for five straight weeks only twice before.
The first time was the pandemic crash. From mid-February to mid-March 2020, XAR lost 45% in five weeks as airlines grounded their fleets.
The second came in the spring of 2022. XAR lost 17.8% over five weeks from mid-April to mid-May, while the whole market fell as the Federal Reserve raised rates.
Both of those streaks came during a broad selloff.
This one does not. The S&P 500 is down just 1.4% since Aug. 14. XAR fell 19.3% over the six completed weeks.
Why Peace Headlines, Budget Talks Hurt
Aerospace and defense shares fell broadly on Sept. 22. The trigger was reports that Iran had offered to reopen the Strait of Hormuz within seven days if the U.S. took initial steps to ease military pressure.
On the same day, President Donald Trump raised the prospect of a negotiated end to the conflict at the United Nations.
Bernstein's Douglas Harned sees a different problem.
"The budget is stalled," Harned said in a note reported on Sept. 23.
Neither chamber of Congress has approved appropriations bills. In addition, the House is in recess until after the midterm elections.
According to Harned, defense stocks went from a 15% premium to the S&P 500 in February, when Trump's $1.5 trillion defense budget proposal was in focus, to a 12% discount today.
A stopgap funding bill through Dec. 11 would lock spending at 2026 levels.
Harned said that adds risk to tactical missiles and interceptors, where inventories are already low.
"We see little urgency to buy U.S. defense before November," he said.
He added that he sees the Nov. 3 elections as "a clearing event and likely a good time to move into these stocks." Meanwhile, he expects the 2027 investment budget to rise by more than 10%.
Worst-Performing Defense Stocks in September
The selling in September was broad. Of the 50 stocks in XAR's portfolio, 42 fell during the month. The fund itself lost 8.7%.
The biggest losses came from defense-tech companies.
Axon Enterprise Inc. (NASDAQ: AXON), which makes Taser devices and police body cameras, fell 25%.
Drone maker Red Cat Holdings Inc. (NASDAQ: RCAT) lost 24.3%.
Suppliers were hit hard as well.
Carpenter Technology Corp. (NYSE: CRS) makes specialty alloys used in jet engines, and its shares fell 19.1%. Karman Holdings Inc. (NYSE: KRMN) makes parts for missiles and space systems and dropped 18.8%.
The largest contractors did better, but they still lost ground. Huntington Ingalls Industries Inc. (NYSE: HII) fell 11.7%, The Boeing Co. (NYSE: BA) fell 11.3% and RTX Corp. (NYSE: RTX) fell 9.7%. Lockheed Martin Corp. (NYSE: LMT) slipped 7.7%.
Only eight holdings finished the month higher, and space companies led that group. Satellogic Inc. (NASDAQ: SATL) jumped 24.2%, and Rocket Lab Corp. (NASDAQ: RKLB) gained 12.9%.
Drone And Defense-Tech Names Led The September Losses
