Mergers and acquisitions (M&A) activity in the defense sector has been at a standstill in 2013 in the over-$100 million category. There have been several noteworthy commercial acquisitions announced by companies with defense operations: Rockwell Collins said last month it is buying Arinc from Carlyle, and Alliant Techsystems is purchasing Caliber Co. from Norwest Equity Partners and Bushnell from MidOcean Partners. But heading into September, the number of defense deals with prices in excess of $100 million is easy to add up: zero.

U.S. defense primes are reporting impressive second-quarter earnings. General Dynamics, Lockheed Martin, Northrop Grumman and Raytheon all raised guidance for 2013, and their stock prices responded favorably. The bite of sequestration—automatic, across-the-board cuts in the Defense Department's budget—has initially proved to be not as harsh as was expected earlier in the year, and operating profits are benefitting from cost-cutting. Shareholders adore the primes' share repurchase

The automatic U.S. budget cuts known as “sequestration” went into effect on March 1, but the sky has not fallen as far as investors and traders are concerned. There is no pure defense stock-price index but shares of the largest U.S. defense primes have outperformed both the S&P 500 and Dow Jones Industrial Average since March 1. Small and mid-size stocks have also performed well and even the major U.S. defense services contractors—Booz Allen, CACI, ManTech and SAIC—have seen their shares appreciate more than broader market indices.