Investing.com — A note from Bernstein analysts on Monday expected a rise in defense spending following Donald Trump’s election victory, citing historical trends and policy signals that suggest continued robust defense spending.
Compared to his first term, analysts expect an increase in the military budget despite initial rhetoric about defense spending cuts.
While noting the uncertainty about Trump’s Department of Public Works, led by Elon Musk and Vivek Ramaswamy, about how it might cause budget cuts that could reduce the salaries of defense companies and government contractors, analysts wrote that “despite the headlines, we have not seen any. statements from Elon Musk raises important issues for major defense contractors.”
But, Musk has recently criticized Lockheed Martin’s F-35 fighter jet program, fueling speculation about the potential scrutiny of big-ticket defense projects.
Pointing to Trump’s first term as a guide, analysts highlighted 2017 when the first talk of budget problems caused investor concern, but the administration ended up overseeing the largest budget since 9/11.
Bernstein expects a similar outcome this term with Congressional budget estimates likely to be eased or eliminated to address inflationary pressures and defense priorities.
Analysts also highlighted the increase in global demand for US defense equipment, as European countries, facing growing security concerns due to Russia’s invasion of Ukraine, are driving strong demand for weapons and tactical weapons exports.
“We expect that US and European defense companies will still benefit from European needs to counter the Russian threat, even if Ukraine is resolved for now,” Bernstein noted.
Key cabinet appointments, including Marco Rubio as Secretary of State and Michael Waltz as National Security Adviser, signal a continuation of a strong defense policy. Analysts expect Trump to prioritize nuclear deterrence, missile defense, and space power, benefiting companies such as Northrop Grumman, Lockheed Martin (NYSE:), Raytheon, and L3Harris.
While the efficiency programs may target key programs such as shipbuilding, which impacts Huntington and the F-35, and impacts 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 see a slowdown in other areas, like the F-35 and shipbuilding. But, finally, Congress has added funding back to these programs”
In what should have been a strong year for the defense sector, with unprecedented demand for American weapons around the world, their shares underperformed the S&P 500.
With past inefficiencies, Bernstein sees reasons for optimism. The combination of growing budgets, strong international demand, and an administration that is likely to prioritize defense spending presents a positive outlook for contractors.
“We are increasingly bullish on the outlook for defense stocks,” Bernstein analysts wrote, naming Lockheed Martin, Northrop Grumman, and General Dynamics as other potential beneficiaries of Trump’s policies. Lockheed Martin (LMT)
