Republican Sweep May Not Boost Defense Stocks This Time: Analysts Divided
While historically Republican-controlled governments have led to strong gains for defense stocks, analysts are divided on whether this trend will hold true in the upcoming election. The conventional wisdom has been that a Republican sweep, with control of both Congress and the White House, brings a boost to the defense sector due to increased defense spending. However, this time, uncertainties surrounding former President Donald Trump’s stance on NATO and potential budget cuts may result in a different outcome.
Key Takeaways:
- Historical trend reversed? While a Republican controlled government typically leads to defense stock outperformance, analysts are uncertain if this trend will continue.
- Trump’s stance on NATO: Trump’s skepticism towards NATO could translate into reduced funding for Ukraine, impacting defense companies.
- Potential budget cuts: Republican control of both houses could lead to cuts in federal IT revenue, impacting defense spending.
- Trade tensions with China: Renewed tensions with China, a possible scenario under a Trump administration, could negatively impact companies like Boeing due to potential tariffs on aircraft exports.
- TD Cowen sees a positive outlook: Despite the uncertainties, TD Cowen believes a Trump presidency would ultimately be beneficial for the defense sector, citing the Republican platform that emphasizes a strong military and American-made defense systems.
Uncertainty Looms Large
Wells Fargo analyst Matthew Akers, who highlighted the historical correlation between Republican control and defense stock gains, believes this time might be different. Trump’s stance on NATO, which has been a source of tension during his previous presidency, could lead to decreased weapons funding for Ukraine. "Trump’s NATO-skeptic outlook could imply decreased weapons funding for Ukraine," Akers said in a note.
Additionally, a Republican-controlled Congress could push for budget cuts, impacting federal IT revenue and potentially impacting defense spending. However, Akers acknowledges that achieving significant cuts would require a strong Republican majority, which is not guaranteed.
"Even with a majority, R leaders would need to thread the needle between [the] House Freedom Caucus on the right, and enough Senate Democrats on the left (40+) to filibuster budgets without an equitable non-defense funding split. Another two years of low growth for both defense and non-defense looks likely to us," Akers wrote in his note.
Boeing’s Potential Risk
Akers also pointed out the risk to Boeing from renewed trade tensions with China. Trump’s past imposition of tariffs on Chinese goods could potentially target aircraft, which are major export items from the U.S. to China.
"Aircraft are large, visible export items from the U.S. to China, and have emerged as a target in ongoing trade tensions between the countries," according to Akers.
TD Cowen Holds a Different View
While Wells Fargo anticipates a potential negative impact on the defense sector, TD Cowen believes a Trump presidency would be beneficial for defense companies.
"We think the prospects for defense companies (top-line growth & transition from development work to production) are better than expected," TD Cowen wrote in a note.
The firm’s optimism stems from the Republican party platform, which emphasizes a “strong military,” restoring peace and prioritizing “made in America” defense systems. While TD Cowen acknowledges that overseas defense and emergency spending could decrease, they believe it won’t disappear entirely.
Market Performance
The iShares U.S. Aerospace & Defense ETF (ITA), which tracks the performance of defense stocks, has underperformed the broader market this year, rising just 7.7%, while the S&P 500 is up 18%. This lagging performance reflects the uncertainty surrounding the election’s potential impact on the defense industry.
Conclusion
The upcoming election and the political landscape it will shape are influencing the outlook for defense stocks. While a Republican sweep has historically been seen as a positive for the sector, this time, uncertainties surrounding Trump’s stance on NATO and potential budget cuts create a complex picture. The impact of these factors, along with the ongoing trade tensions with China, will need to be closely monitored to understand the long-term implications for the defense industry.
