The Future of Defense Stocks in the Current Political Climate

In the past, a GOP sweep has led to significant gains for defense stocks. However, the upcoming election may paint a different picture. Historically, the defense sector has performed well when there’s been a single party in control across Congress and the executive branch, particularly the Republican Party. Wells Fargo analyst Matthew Akers noted that the sector outperformed the S & P 500 by over 12 percentage points under a GOP-controlled government. Under a Democrat-led government, it still beat the broad market index by nearly 6 percentage points. Despite polls indicating former President Donald Trump leading in the race against President Joe Biden, Akers believes that a Republican sweep this election cycle may not benefit the defense sector. Trump’s NATO-skeptic outlook could imply reduced weapons funding for Ukraine, which would impact defense stocks.

In the case of Republican control in both branches of the legislative branch, budget cuts for federal IT revenue may occur. Akers mentioned that this could be challenging unless there is a stronger Republican majority than what current polls suggest. The need to balance the views of different factions within the party and Senate Democrats could lead to limited growth in both defense and non-defense sectors. Additionally, the potential for further tariffs against China under a Trump administration could negatively affect companies like Boeing. Aircraft exports to China have been a target in ongoing trade tensions, posing a risk to the aerospace industry.

Contrary to Akers’ analysis, TD Cowen believes that a Trump presidency would actually benefit the defense sector. The firm suggests that while overseas defense and emergency spending might decrease, it won’t disappear entirely. TD Cowen is optimistic about the prospects for defense companies, emphasizing top-line growth and the transition from development work to production. The firm points to the Republican Party’s platform, which emphasizes a “strong military,” peace restoration, and support for “made in America” defense systems. Despite the current lagging performance of the iShares U.S. Aerospace & Defense ETF (ITA) compared to the broader market, TD Cowen is positive about the future of defense stocks.

The future of defense stocks in the current political climate remains uncertain. While historical trends suggest a preference for one-party control for the sector’s outperformance, the upcoming election poses unique challenges and opportunities. Investors should carefully monitor political developments and consider various perspectives when making decisions regarding defense stocks.