Goldman warns these defense stocks could take a hit from Trump spending cuts
Shares of some aerospace and defense companies could fall under added pressure from President-elect Donald Trump’s reduced government spending plans. Goldman is forecasting that the U.S. defense budget will soon flatten out and then decline, partly given that it’s at an all-time high and that current geopolitical conflicts could potentially be met with a resolution. Also, Trump’s plan to create a Department of Government Effiency, or DOGE, wouldn’t necessarily help the defense sector, the firm said, given that the group intends to restructure federal agencies and cut spending in an effort to bring down the national debt. The Department of Defense receives a large portion of total U.S. government spending. “Whether or not DOGE impacts defense spending, we already hold a cautious view on the defense sector … the DoD budget is near peak relative to historical cycles and spending levels, margins are structurally under pressure, while valuations are high,” analyst Noah Poponak said in a recent note to clients. “Defense spending cycles up and down over time, and can be vulnerable to efforts to reduce total government spending.” Poponak noted that although Trump has expressed broad support for the U.S. military and Department of Defense, any cost-cutting effort could still be a blow for the national defense budget. “It is difficult to embark on any large government spending reduction effort without touching defense, and there are potentially enough inefficiencies within the defense budget to reduce its total level without necessarily reducing military readiness or capability,” he said. Poponak maintained his sell ratings on Lockheed Martin , Northrop Grumman , L3Harris Technologies and Huntington Ingalls Industries . As of Monday, shares of these four names had taken a significant hit this month, with defense contractor Lockheed losing more than 13% and Huntington Ingalls plunging nearly 25% during this time. Lockheed’s recent earnings report reflected an increase in its annual profit and sales forecasts, but its F-35 fighter jet program has faced several challenges that have dragged the stock lower. Northrop recently beat third-quarter earnings expectations, but fell short of analysts’ revenue projections, per LSEG. Poponak recommended sticking with companies in government IT, as that sector has substantially outperformed defense hardware given current market share shifts in national security budgets to data analytics, cyber and artificial intelligence. Booz Allen Hamilton is expected to be the biggest beneficiary of this trend, he said. Leidos Holdings is another buy-rated pick as it trades at a discounted valuation even after seeing strong growth and margins. “Lower defense spending would flow to government IT to some degree. … It is also possible that a DOGE effort determines the advanced technologies of these companies helps to create efficiencies, especially if there is an effort to reduce the size of federal agencies, such that there is a scenario where government IT companies are a net beneficiary of DOGE,” the analyst wrote. Shares of popular defense ETFs have slumped in recent weeks. The iShares U.S. Aerospace & Defense ETF and Invesco Aerospace & Defense ETF are down 3% and 1.8% over the past month, respectively, but are still showing strong year-to-date gains.
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