By Paul R. La Monica
The outcome of the U.S. presidential election is increasingly looking like it may be a tossup. But one thing seems certain: Regardless of whether Kamala Harris or Donald Trump wins the race for the White House -- and no matter the makeup of Congress -- America is probably going to boost spending for the military next year and beyond.
The Biden-Harris administration and current lawmakers haven't shied away from spending more on defense. The Senate and House have already approved an increase in the 2025 Pentagon budget, including more money for the F-35 fighter jet program. That would be a boost for defense contractor giant Lockheed Martin, maker of the F-35. Other big defense stocks, such as RTX, General Dynamics, BAE Systems, and L3Harris, should also get a lift. (The two bills still need to be reconciled and signed by President Joe Biden.)
Military spending could climb even further under a second Trump term, despite comments from the former president about how Taiwan should pay the U.S. for protection against China, as well as concerns that Trump may reduce military support for Ukraine in its conflict with Russia.
"Both parties are pro-defense," said Matt Benkendorf, chief investment officer of the quality growth boutique at Vontobel Asset Management. "Given the state of conflict in the world, geopolitical risks are getting hotter, not cooler."
Along those lines, it's important to remember that bigger defense budgets aren't just a hallmark of U.S. politics. They're a global phenomenon as well. The recent escalation between Israel and Iran is a reminder that tensions in the Middle East are unlikely to ebb soon. According to data from the Stockholm International Peace Research Institute, military expenditures around the world were up in 2023 for the ninth consecutive year, hitting an all-time high of $2.44 trillion. Expect that figure to climb further this year and beyond.
"Geopolitics can be expected to drive increased defense spending in the years ahead, creating solid investment opportunities," said Steve Barry, global head of fundamental equity at Goldman Sachs Asset Management, in a midyear outlook report.
So how should investors play this? Most of the major defense stocks trade at multiples roughly in line with the broader market, around 20 to 25 times earnings estimates. The major exception? Boeing. The troubled commercial aircraft manufacturer, which is expected to lose money this year, trades at nearly 45 times 2025 earnings forecasts -- making it a stock that investors need to be wary of. Even if its defense business gets a bump, the stock looks expensive and faces a potentially long period of weak performance from its commercial aviation unit.
The iShares U.S. Aerospace & Defense exchange-traded fund (ticker: ITA) is one way to gain broad exposure to the sector, but Boeing is a big holding in that fund. The Global X Defense Tech ETF $(SHLD.UK)$ has more of an international bent and doesn't own Boeing. More than a third of its holdings are based outside the U.S., including Germany's Rheinmetall, France's Thales, and Italy's Leonardo. The fund trades at about 22 times 2024 earnings forecasts, in line with the S&P 500 index.
Cybersecurity stocks are also part of the equation. The Pentagon named an Assistant Secretary of Defense for Cyber Policy earlier this year and requested $14.5 billion in funding for cybersecurity as part of its 2025 budget. CrowdStrike Holdings, hit hard by a recent service outage, might be able to bounce back too. And as threats from bad actors around the globe continue to rise, companies like Palo Alto Networks, Cloudflare, Fortinet, and Zscaler can benefit from the potential for increased government spending. Two ETFs focusing on the sector, First Trust Nasdaq Cybersecurity $(CIBR.UK)$ and Amplify Cybersecurity $(HACK)$, trade at around 25 and 28 times earnings estimates, respectively.
Investors would be wise to focus on cybersecurity stocks as well as traditional weapons makers. The 21st century version of playing defense is as much about combating malware as it is shooting down missiles.
Write to Paul R. La Monica at paul.lamonica@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
August 16, 2024 02:00 ET (06:00 GMT)
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