Defense and aerospace stocks are sliding in Monday trading as the US-Iran ceasefire framework announced over the weekend forces a recalibration of geopolitical risk premiums baked into the sector since late last year. The Defense ETF (ITA) is down 2.8% in early action, with Lockheed Martin (LMT) falling 3.1%, RTX Corporation (RTX) off 2.6%, and Northrop Grumman (NOC) sliding 3.4%. General Dynamics (GD) is down 2.2% and L3Harris (LHX) is off 3.0%.

So what’s the story here? It’s not just about the immediate ceasefire. Traders are looking past the 60-day halt in hostilities and asking what happens to the Pentagon’s FY2027 budget request if Iran de-escalation holds. The House Armed Services Committee had been marking up defense authorization bills with Middle East contingency spending baked in — missile defense batteries, aerial refueling deployments, carrier strike group rotations in the Arabian Sea. A durable truce could shift billions in projected procurement to other theaters or delay them entirely.

“The market priced a nonzero probability of sustained Middle East conflict into defense names since the Q4 escalation,” said Byron Callan, an independent defense analyst. “A ceasefire that looks credible changes the baseline. It doesn’t kill any major programs — nobody’s canceling the F-35 or the B-21 over this — but it does remove an upside catalyst that some investors were playing.”

The pain isn’t uniform. Companies with heavy exposure to the Indo-Pacific theater are holding up better. RTX and L3Harris, both heavily tied to missile defense contracts for Taiwan and Japan, are down less than their peers. Kratos Defense (KTOS), which has limited Middle East revenue exposure, is only off 1.1%. The big movers to the downside are names with direct logistic-support contracts in the Gulf region — AAR Corp (AIR) is down 4.7% and V2X (VVX) is off 5.2%.

For the broader market, the defense selloff is being treated as a sector rotation rather than a risk-off signal. Money flowing out of defense names is rotating into cyclicals, financials, and consumer discretionary — classic ceasefire positioning. The question for defense bulls: does this ceasefire become a multidecade framework like the Iran nuclear deal, or does it fall apart in 60 days? The market will have time to figure that out. For today, the munitions makers are getting sold. If the peace holds, they’ll probably stay sold.