Analysts Predict Defense Stocks Will Surge with Trump's Return

Investing.com -- In a note released by Bernstein analysts on Monday, it is indicated that a rise in defense stocks is expected following Donald Trump's election victory. This expectation is based on historical trends and political signals suggesting that strong defense spending will continue.

Analysts predict that despite early rhetoric indicating cuts in defense spending compared to Trump's first term policies, military budgets will increase. They note the uncertainty around budget cuts that could potentially lower the earnings of defense companies and government contractors, highlighting that "despite the headlines, we have not seen any statements from Elon Musk indicating significant issues for major defense contractors."

However, Musk's recent criticism of Lockheed Martin's F-35 fighter jet program has increased speculation regarding the potential scrutiny of large-scale defense projects.

Analysts, referencing Trump's first term, emphasized that the initial discussions of budget constraints in 2017 caused concerns among investors, but the administration ultimately presided over the largest procurement budget since September 11.

Bernstein expects a similar outcome during this period, forecasting that congressional budget constraints will likely be eased or lifted to deal with inflationary pressures and defense priorities.

They also highlighted an increase in global demand for U.S. defense equipment driven by European countries facing heightened security concerns due to Russia's invasion of Ukraine, noting strong export demand for tactical weapons and munitions.

Bernstein stated, "Even if the situation in Ukraine is resolved for now, we expect that needs in Europe against the Russian threat will still benefit U.S. and European defense firms."

Significant cabinet appointments, such as Marco Rubio as Secretary of State and Michael Waltz as National Security Advisor, signal a continuation of strong defense policy. Analysts expect Trump to prioritize nuclear deterrence, missile defense, and space capabilities, benefiting companies like Northrop Grumman, Lockheed Martin (NYSE:LMT), Raytheon, and L3Harris.

While efficiency initiatives may target important programs affected by Huntington’s shipbuilding and Lockheed and Northrop, Bernstein expects Congress to restore funding to these programs as it did during Trump's first term.

"If we see this again, we could witness slowdowns in certain areas such as the F-35 and shipbuilding. However, last time, Congress added funding back to these programs."

Despite unprecedented global demand for American weapons making this a boom year for the defense sector, stocks in this sector have lagged behind the S&P 500.

Despite past underperformance, Bernstein sees reasons for optimism. A combination of rising budgets, strong international demand, and a likely administration prioritizing defense spending presents a positive outlook for contractors.

Analysts at Bernstein wrote, "We maintain a gradually optimistic stance on the outlook for defense stocks," identifying Lockheed Martin, Northrop Grumman, and General Dynamics as companies likely to benefit the most from Trump's policies.