Defense stocks tend to benefit from Republican control. Analysts warn that may not happen under Trump
A GOP sweep has led to big gains for defense stocks in the past. This time, however, that may not be the case. Defense has historically performed better when a single party controls Congress and the executive branch—particularly Republicans—according to Wells Fargo analyst Matthew Akers. He notes that the sector outperformed the S&P 500 by more than 12 percentage points under a GOP-controlled government. Under a Democratic-led government, the sector outperformed the broader market by nearly 6 percentage points. Polls show former President Donald Trump holding an election advantage over President Joe Biden. However, Akers believes the defense sector may not benefit from a Republican sweep this election cycle. Trump’s NATO-skeptical outlook could mean cutting off arms funding to Ukraine, the analyst says. Republican control of both branches of the legislature could lead to budget cuts to federal IT revenue — something that, Akers said, could be difficult unless there is a stronger Republican majority than current polls suggest. “Even with a majority, Republican leaders will still need to thread the needle between [the] The House Freedom Caucus is on the right, and there are enough Democratic senators on the left (more than 40) to block passage of a budget without a fair share of non-defense spending. We are likely to see two more years of low growth for both defense and non-defense, Akers wrote in a note on Tuesday. The possibility of additional tariffs on China under a Trump administration could also hurt Boeing. “Aircraft are a large, highly visible export from the United States to China and have been a target in the ongoing trade tensions between the two countries,” Akers said. However, TD Cowen believes the opposite scenario is more likely. The firm said a Trump presidency has been positive for the defense industry. While the firm agrees that spending on defense and overseas contingencies could decline, it doesn’t think it will go away completely. “We believe the outlook for defense companies (top-line growth and transition from development to production) is better than expected,” TD Cowen wrote in a note. The firm cited the Republican platform, which emphasizes “strong military,” restoring peace and “made in the USA” defense systems. The iShares U.S. Aerospace and Defense ETF (ITA) has lagged the broader market this year, up just 7.7% — while the S&P 500 is up 18%. ITA .SPX YTD ITA mountains year to date
