Investing.com — A note from Bernstein analysts on Monday expects a boost for defense stocks following Donald Trump’s election victory, citing historical trends and policy signals that suggest a continuation of strong defence spending.
Drawing comparisons to his first term, analysts expect increased military budgets despite the early rhetoric around defense spending cuts.
While noting uncertainty surrounding Trump’s Department of Government Efficiency, co-led by Elon Musk and Vivek Ramaswamy, on how it may result in budget cuts that could reduce defense company's and government contractors' earnings, analysts wrote “despite headlines, we have not seen any statements from Elon Musk that suggest significant issues for major defense contractors.”
But, Musk has recently criticised Lockheed Martin’s F-35 fighter jet program, fuelling speculation about potential scrutiny of big-ticket defence projects.
Pointing to Trump’s first term as a guide, analysts highlighted 2017 when initial talk of budget constraints gave rise to investor concern, but the administration ultimately presided over largest procurement budget since the 9/11.
Bernstein expects a similar outcome in this term with Congressional budget caps likely to be eased or removed to deal with inflationary pressures and defence priorities.
Analysts also highlighted the surge in the global demand for U.S. defence equipment, as European nations, grappling with heightened security concerns due to Russia’s invasion of Ukraine, are driving strong export demand for tactical weapons and munitions.
“We expect US and European defense firms to still benefit from needs in Europe to address the Russia threat, even if Ukraine is resolved for the time being,” Bernstein noted.
Key cabinet appointments, including Marco Rubio as Secretary of State and Michael Waltz as National Security Advisor, signal a continuation on a strong defence policy. Analysts anticipate that Trump will prioritize nuclear deterrence, missile defence, and space capabilities, benefitting companies like Northrop Grumman, Lockheed Martin (NYSE:LMT), Raytheon, and L3Harris.
While efficiency initiatives may target key programs like shipbuilding, impacting Huntington and the F-35, impacting Lockheed and Northrop, Bernstein expects Congress to restore funding to these programs, as it did during Trump’s first term.
“Should we see this again, we could see a slowing in some areas, such as F-35 and shipbuilding. But, last time around, Congress added funding back to these programs”
The year that should have been a boom time for defense sector, with unprecedented weapons demand for American weapons across the world, their stocks have underperformed the S&P 500.
With past underperformance, Bernstein sees reasons for optimism. The combination of rising budgets, strong international demand, and an administration likely to prioritise defence spending provides a favorable outlook for contractors.
“We are incrementally positive on the defense stock outlook,” analysts at Bernstein wrote, naming Lockheed Martin, Northrop Grumman, and General Dynamics as among the most likely beneficiaries of Trump’s policies.Lockheed Martin (LMT)
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