Shares of drone makers and suppliers, once the hottest names in the US stock market, are poised to fall further as investors worry a blue wave in the US midterm elections could squeeze funding for the industry.

If the Democrats take control of one or both chambers of Congress, funding that’s critical for the Pentagon’s ambitious plans to scale up drone production may be in jeopardy. That spells trouble for stocks of companies counting on those plans.

“A Democratic sweep would certainly put the reconciliation proposal at risk,” said Jefferies analyst Sheila Kahyaoglu, referring to a fast-track process that the Trump administration is using to try to push through mandatory defense funding.

The reconciliation has supported drone stocks earlier this year, driving the BofA US Drone Ecosystem Index up nearly 120% from the end of 2024 through mid-January of this year. Since then, the gauge has plummeted 40% through Tuesday’s close, while the broader S&P 500 Index has risen 11%.

The Pentagon’s $1.5 trillion defense budget request for fiscal 2027 — including discretionary and mandatory funding — has about $75 billion for drones and counter-drone technologies. However, of that, about $55 billion earmarked for autonomous warfare development is directly vulnerable since it is part of a reconciliation that can get blocked if Republicans lose their majority control in either the House of Representatives or the Senate.

The US has been racing to expand domestic drone production amid the growing role of unmanned systems in modern warfare, driven by ongoing conflicts in the Middle East and Ukraine. Drone-related companies — including Red Cat Holdings Inc., Unusual Machines Inc. and AeroVironment Inc. — stand to benefit from that push.

According to Todd Harrison, a senior fellow at the American Enterprise Institute, if reconciliation is off the table in the next Congress, “a lot of this drone funding may never happen.”While Congress could shift some of that spending into the 2027 defense budget request, it wouldn’t be able to do so as quickly or to the same degree as proposed under reconciliation, Harrison added.

A change in congressional control would also “engender greater scrutiny about defense spending, and certainly not just rubber-stamp Defense Department requests,” said Steve Sosnick, chief strategist at Interactive Brokers.

For drone makers and suppliers, the stakes may be particularly high. Without such funds, “that could be the end of them,” Harrison said.

Rising geopolitical tensions, alongside a push for higher global defense spending, have sharpened the focus on drones and low-cost autonomous platforms. Their extensive use by Iran, Israel and the US in the current conflict echoes a pattern established since Russia’s 2022 invasion of Ukraine.

“Drone warfare is unquestionably changing the economics of modern defense,” said Ivan Feinseth, chief investment officer at Tigress Financial Partners.

The new crop of defense-tech companies that emerged from such a shift benefited from expectations of long-term growth, helping drive drone stocks higher.

Now that the initial euphoria has passed, however, investors are recalibrating expectations around procurement delays, rising capital costs and political uncertainty, Feinseth said.

Texas-based Swarmer Inc., whose AI platform is used to deploy and coordinate drone swarms, soared nearly 1,000% in its first three trading sessions after its initial public offering in March, but now trades about 88% below its June 2 high. Military drone manufacturer Aevex Corp. doubled in two trading sessions after its listing, but the stock is down 43% so far this year.

“These drone stocks were in a bubble. Given the significant decline in many of these names, the bubble has indeed burst,” said Matt Maley, chief market strategist at Miller Tabak & Co.

Still, drone stocks continue to trade at valuations significantly richer than the broader market, as well as traditional defense contractors. The group’s valuations reflect future growth expectations that may take years to fully materialize, according to Feinseth, suggesting there might be more room to fall.

Drone maker Kratos Defense & Security Solutions Inc. trades at 36 times forward earnings and AeroVironment is trading at 27 times forward earnings, according to data compiled by Bloomberg. Shares of both companies have dropped more than 45% this year. Meanwhile, AI-enabled drone and autonomous systems maker Ondas Inc. currently trades at 117 times forward earnings, data shows. That stock is down 53% from its Jan. 8 peak.

Nevertheless, the recent selloff could present an entry point for some investors, according to Maley. The declines make several names more attractive because “a lot of the election fear has already been priced in,” he said.