Topline
Shares of major U.S. aerospace and defense companies, which have jumped since Russia launched its invasion of Ukraine last week, should continue to surge higher as global defense spending budgets increase in response to the conflict in eastern Europe, analysts predict.
Key Facts
As the ongoing conflict between Russia and Ukraine wreaks havoc on financial markets, defense stocks are outperforming and Wall Street analysts say they’ll keep rising.
The iShares U.S. Aerospace & Defense ETF, the largest of its kind with 33 equity holdings, has risen more than 5% since Russian troops invaded Ukraine on February 24.
Defense stocks have widely soared in that time: Shares of Raytheon Technologies are up nearly 8%, General Dynamics 12%, Huntington Ingalls Industries 14%, Lockheed Martin 18% and Northrop Grumman 22%.
Though the U.S. and other Western allies have stopped short of sending troops to Ukraine, they have been sending weapons made by the likes of Raytheon and Lockheed Martin, such as Javelin anti-tank missiles and Stinger anti-aircraft missiles.
With NATO deploying more troops to member countries in eastern Europe near Ukraine’s border, the ongoing geopolitical tensions should boost defense stocks in the long term as global defense spending is set to increase, according to analysts.
Several Western allies are already planning defense budget increases, including Germany, which said its defense budget would now make up over 2% of its GDP from 1.5%; Japan also plans to increase its 2022 defense budget to more than 1% of GDP for the first time since the 1960s.
Crucial Quote:
“With geopolitical tensions likely to remain high, we expect many countries (both inside & outside of NATO) to look to fortify their military capabilities and increase defense budgets on a secular basis,” according to a note from Chris Senyek of Wolfe Research earlier this week.
Key Background:
“As we think about the events that unfolded last week in eastern Europe, there has been a tectonic shift in geopolitical stability,” Bank of America’s Ronald Epstein said in a note this week. “Europe has not seen anything like this since WWII, and the U.S. and its NATO allies now have to focus on managing escalation along Russian borders.” Given Russia’s significant military operations in Ukraine, it is now “worthwhile to reconsider” the effects of the war on global defense budgets, says Morningstar analyst Burkett Huey. With the conflict likely to “encourage more spending,” that will lift the valuations of prime contractors, he predicts. “In a rising defense budget environment, defense stock multiples should typically rise,” adds Epstein.
What To Watch For:
News from Washington, D.C., on U.S. defense spending for fiscal 2023, due in mid-March. Thanks to the “paradigm shift” caused in international relations by Russia’s invasion of Ukraine, analysts at Bank of America expect America’s defense spending to rise to between 3.5% and 4% of GDP.
Further Reading:
Wheat Prices Surge Amid Russia’s Invasion Of Ukraine—Here’s What That Means For U.S. Food Costs (Forbes)
Russia’s Invasion Of Ukraine Has Sent Energy Prices Soaring—Here’s How High Oil Could Rise (Forbes)
