2025 Government Contractor Stock Performance – An Analysis and Some General Commentary
“Financial analysts are divided on whether the stock market is in a bubble, with some citing historically high valuations and narrow market breadth as red flags, while others point to strong corporate earnings and specific market dynamics that differentiate the current environment from past bubbles. As of late September 2025, several key indicators show the market is significantly overvalued by historical standards, but strong earnings and interest in artificial intelligence (AI) offer some counterpoints.”
--Google AI, September 24, 2025
For several years, I did periodic blogs reporting on the business “temperature” of government contractors as measured by the stock market. The largely unremarkable answer was usually steady as we go, neither leading nor significantly fading the general market. Government contractor’s share price returns were usually either just moderate or lagging the general market. For my blogs, I used a government contractor Exchange Traded Fund (“ETF”) as a proxy for the market, but that ETF never took off as an investment vehicle, and eventually it was terminated. See, e.g., https://www.awrcounsel.com/blog/2023/3/20/dont-look-now-the-government-contractor-etf-is-gone?rq=stock%20market. I suppose the mediocre performance of the government contractors over time doomed the ETF since it failed to attract enough investor interest. For ETFs, shiny, newer investment ideas took the stage.
In the post-ETF world, I looked at a few leading government contractors and their trading history to try tease out what was going on. But I never had a significant sample size such that it gave me much confidence in my conclusions. See
For this blog, I playfully instead asked Google AI directly whether we were in a stock market bubble and the equivocal answer is set forth above. I then asked Google AI to compare the performance of government contractor companies to the general market and comment on how they are doing. Here is the AI response:
Recently, major government contractors—particularly in the aerospace and defense sector—have seen their stocks significantly outperform the broader market in 2025. This follows a mixed performance in 2024, where government service contractors slightly underperformed the S&P 500, even as defense stocks benefited from geopolitical tensions.
Google AI reported that, as of last week the S&P Aerospace and Defense Select Industry Index was up 44% year -to-date in 2025, while the broader general S&P 500 Index was up 10.3%. The outperformance appears to have continued into this week with the Administration signaling its desire for ever more missiles and other weapon systems, since Ukrainian and Israeli offensive and defensive needs, and the Iranian nuclear facility strikes, have done much to hollow out the arsenal of democracy. Other reasons given for that out performance are the increase in global air passenger traffic, the enactment of the ”One Big Beautiful Bill Act”, and the reliability of the defense budget. See https://qz.com/aerospace-defense-stocks-2025-outlook.
Moving past the niche of large aerospace and defense government contractors, CohnReznick for several years had released a semi-annual Government Contractor Valuation Tracker: H1 which reports on key valuation trends. However, the most recent report on the web is for 2024. See https://www.cohnreznick.com/insights/government-contractor-valuation-tracker-h1-2024. That 2024 mid-year report confirmed that publicly traded government contractors slightly underperformed the S&P 500 through June 2024, returning 18.2% compared to the general index’s 21.7%. It is not clear whether CohnReznick is committed to any future updates on valuation.
Some of that slack is picked up by George Mason University which released its inaugural 2025 Government Contracting Trends and Performance Index, a first-of-its-kind analysis of the 200,000 firm industrial base providing nearly $800 billion in products, materials, and services to the whole of the Federal government. They say they will publish the index annually. The report suggests that “Overall, the survey results indicate that the sampled companies exhibit a financial performance level that can be considered good.… Across the different subsegments of the sample, companies on average reported a financial performance level that also can be considered healthy….” Id. at 14 (of 84 pages). The scoring suggests a slight improvement in in financial performance for most government contractors. However, exactly how this translated into stock market performance appears to be beyond the scope of the survey report.
Accordingly, as I made plain in my last few blogs on stock market metrics, the situation for government contracting remains opaque when it comes to stock market performance. Like many areas of data collection, recently the pickings are poor. One of the impacts of DOGE was just to degrade the amount and reliability of federal government produced data. As for general financial performance metrics, we will have to wait perhaps to 2026 to see what impact the DOGE rampage has had on Government contractors.
And I can’t resist a final word on what that means for the Washington, DC metro area. The impact of the DOGE budget cuts on the contracting and grants community can’t be underestimated. Contractors are laying low and some are wounded animals. There is no good news in the Fork in the Road retirements of Federal employees, contractor layoffs, rising unemployment rates in the DMV (District, Maryland and Virginia) and District of Columbia, and the damping economic impact of authoritarian policies and the National Guard occupation of the city to ostensibly suppress crime. Last night came the budgetary appropriation impasse, the Government shut down, and many new uncertainties. It is hard to see how the DC condominium market in particular is going to survive unscathed by this calumny of events. The Brookings Institute is keeping tabs on this problem: https://www.brookings.edu/articles/early-warning-signs-for-the-dc-regions-economy-amid-federal-downsizing/. Where government contracting goes, there likely goes the fortunes of the DMV. For now, it looks like a tale of two cities for the contracting community. A few big weapons producers and aerospace contractors, on one side, are prosperous, and everyone else is fighting for a smaller pile of scraps and keeping their lips buttoned down.