Soon, there will be an election for president. The outcome will almost certainly have an effect on defense stocks in late 2024 and early 2025.
The good news? Investors don’t need to worry too much about the amount of money being spent on defense, since that money is what makes defense companies make money and boosts sales. But there are some policy differences that will matter between Trump and Harris. Bush was president and Harris was vice president.
In a recent report, Truist expert Michael Ciarmoli said, “This is our fifth Presidential Election over which we have written.” Among other things, he has seen parties change, wars start and end, budget sequestration, changes to tax rates, and changes to National Defense policies.
Even so, he isn’t worried about the need to modernize U.S. warfighting skills or the need to increase global defense spending “given the elevated global threat level.”
Tax policies, of all things, will become more important to the stock after the election: “Defense contractors are all U.S. domiciled and make most of their money from sales in the U.S., which makes them very sensitive to changes in corporate tax rates.”
Trump wants to lower rates from 21% to 15%. He wants it to go up to 28%. Trump’s plan makes defense stocks worth about 10% more on average. Citaroli writes that Harris’ plan would lower the value by almost the same amount.
Price-to-earnings ratios are another thing buyers should keep an eye on besides tax rates.
He looked back to 1980, the year after the election, and found that defense stocks usually traded for 90% of the S&P 500 SPX-0.13% P/E ratio. When Republicans were in power, defense stocks had a P/E ratio that was about the same as the market as a whole. When Democrats took office, however, the defense discount grew to 80% of the S&P 500 multiple.
That’s only a one-year change, which makes it hard to plan a portfolio. But it shows that most investors think Republicans are better for defense stocks.
Overall, defense stocks have done better than the S&P 500 over the last six administrations, with three Republican and three Democratic Presidents. The performance was similar whether the government was Republican or Democratic.
Based on what Ciarmoli has found, buyers may want to sell defense stocks in 2025 in order to make money. No matter who wins, there doesn’t seem to be a reason to make big changes right now.
The stock prices of Lockheed LMT 0.86% Martin, Northrop Grumman NOC 0.47%, L3Harris Technologies LHX 1.48%, and General Dynamics GD -0.12% were all up about 33% over the last twelve months as of Friday trade. All four stocks went up. In that time, the S&P 500 is up about 34%.
Out of all the big defense contractors, General Dynamics stock is the most popular. About 71% of analysts who watch the stock have given it a Buy rating. For stocks in the S&P 500, the average “buy” grade is about 55%.
There are 52% buy ratings for L3Harris, 48% buy ratings for Lockheed, and 37% buy ratings for Northrop.
About 59% of people who own shares of Boeing BA 1.13%, which is also one of the biggest defense companies in the US, say they should be bought. Rob Stallard, an analyst at Vertical Research Partners, says that Boeing stock is a “special situation” right now. Shares are being driven more by the company’s own problems than by market trends.
There are lots of problems to talk about. The company is trying to improve the quality of its commercial airplane production while workers are on strike. There are also problems in the defense division, where fixed-price contracts make it harder to make money after years of inflation that was higher than planned.
