Space Sector Plunges: Problems Extend Beyond SpaceX

According to MarketWatch, as SpaceX (SPCX-US) stock continues to retreat, other space-related stocks are also facing selling pressure. However, the broader industry's weakness isn't solely due to waning confidence in the most high-profile space company.

One major factor is growing investor concern that if the Democratic Party regains control of the House of Representatives after the U.S. midterm elections this fall, new defense spending bills could face a long and difficult approval process.

Trevor Walsh, an analyst at Citizens, noted in a report to clients that midterm election uncertainty, combined with the still-unclear prospects of U.S.-Iran conflict, could lead to "protracted negotiations within Congress."

In fact, space stocks have always been highly volatile investments. According to Goldman Sachs data, their volatility is about twice that of AI-related stocks and approximately five times that of the S&P 500 index.

But the recent downturn has been especially severe. According to FactSet, the Procure Space ETF (UFO-US) fell 22.4% in June and has dropped another 13.5% so far in July. Other space-tracking ETFs, including the Roundhill Space and Technology ETF (RSPY-US) and other space-themed ETFs, have seen similar declines.

Many space company stocks have plunged in July. Intuitive Machines (LUNR-US) has tumbled 42% so far this month, while Satellogic (SATL-US) is down 38%. FactSet reports that at least 10 other space-related stocks have fallen more than 30% in July, including AST SpaceMobile (ASTS-US) and Planet Labs (PL-US).

This correction has even inflicted heavy losses on long-term space industry investors. Jacob Keeton, a retail investor who was previously featured in a MarketWatch interview for his aggressive bet on Rocket Lab (RKLB-US), posted on X last week that he had nearly lost all his capital due to high-risk investments.

Analysts broadly agree that the recent stock declines are partly driven by market fears that midterm elections could disrupt the U.S. defense budget. Current polls suggest that Trump's Republican Party could lose control of the House, although Senate control remains relatively stable.

Michael Leshock, an analyst at KeyBanc, stated, "If the House flips, the fastest-growing, least-established defense tech companies could face the biggest impact—especially those relying on budget reconciliation, supplemental appropriations, and new programs. The recent sharp correction in defense tech stocks largely reflects the market pricing in this risk."

Citigroup analyst John Godyn said last week that investors are beginning to worry that "defense spending has peaked" and that Democrats could win a landslide victory in the elections. This month, many Democratic lawmakers in Congress voted against parts of the Pentagon's budget, whereas such defense budgets typically enjoyed bipartisan support in the past.

Leshock believes that if Congress becomes more divided, the White House's proposed $1.5 trillion defense budget—particularly the roughly $350 billion portion allocated through budget reconciliation—could face delayed approval or even cuts. This would directly impact space companies reliant on government contracts. For example, Rocket Lab only just secured a $266 million defense contract this past Monday.

Beyond defense budget uncertainty, the market is also recalibrating investment expectations for the space sector. One reason is the continued post-IPO correction in SpaceX's stock. Although it rebounded nearly 3% on Tuesday, its current price remains about 48% below its peak.

Walsh said, "Before SpaceX's IPO, many space-related stocks enjoyed a 'halo effect.' They rose along with SpaceX, and now as the excitement fades, they're falling along with it."

SpaceX is scheduled to release its first earnings report as a public company next Tuesday. The market expects this report to not only shape SpaceX's future trajectory but also potentially trigger a new wave of volatility across the entire space stock sector.