What a Trump or Harris Win Would Mean for Boeing Stock and Other Defense Names
The 2024 Presidential election is fast approaching, and the outcomes are poised to create rippling effects across many sectors, most notably defense stocks. As traditional investors, it’s crucial to understand the implications of this election on companies like Boeing, Lockheed Martin, and Northrop Grumman. The good news for those invested or looking to invest in defense is that demand for defense spending remains robust, irrespective of the political climate.
The Political Landscape and Defense Spending
According to Truist analyst Michael Ciarmoli, who has chronicled the defense industry through multiple elections, the current elevated global threat level ensures that defense spending remains a priority. Historically, spikes in global threats have led to increased investments in modernizing U.S. military capabilities, thus benefitting defense contractors.
However, while global military needs may remain constant, the policies of the candidates vying for the Oval Office will have distinct impacts on corporate tax rates, which are pivotal for defense contractors all domiciled in the U.S. This election features former President Donald Trump, who proposes slashing corporate tax rates to 15%, versus Vice President Kamala Harris, advocating for a hike to 28%. According to Ciarmoli, Trump’s tax plan could raise the value of defense stocks by nearly 10%, while Harris’s could have nearly the opposite effect.
Impact on Defense Valuation Metrics
Beyond tax policy, the dynamics of price-to-earnings (P/E) ratios play a crucial role in evaluating the performance of defense stocks post-election. Looking back to 1980, defense stocks generally traded at 90% of the S&P 500 P/E ratio in the year following elections. Under Republican administrations, the P/E ratios for defense stocks align closely with the broader market. In contrast, under Democratic leadership, the defense sector has a tendency to trade at an 80% discount to the S&P 500 multiple.
This historical performance suggests a deeply rooted investor sentiment that aligns Republican leadership with better outcomes for defense stocks. Despite the political operating environment, returns from defense stocks have consistently outperformed the S&P 500 over six administrations—three from each party. Such trends could signal that investors should be considering profit-taking in defense stock holdings as we approach a new election cycle in 2025, but drastic changes in portfolio allocation may not be necessary just yet.
Current Market Performance of Defense Stocks
As of Friday’s trading, heavy-hitters in the defense sector such as Lockheed Martin, Northrop Grumman, L3Harris Technologies, and General Dynamics have all shown an impressive uptick, averaging around 33% gains over the past 12 months. In comparison, the S&P 500 has seen an increase of approximately 34% during the same timeframe. General Dynamics stands out with around 71% of analysts recommending a buy, surpassing the average buy-rating ratio of 55% for S&P 500 stocks.
While L3Harris, Lockheed, and Northrop have buy-ratings of 52%, 48%, and 37% respectively, Boeing is an intriguing case, with a buy-rating of around 59%. This positioning may not adequately reflect the internal complexities that Boeing is currently grappling with.
Boeing: A Special Situation?
Vertical Research Partners analyst Rob Stallard has classified Boeing stock as a “special situation.” This comes amid various internal challenges that are overshadowing broader market trends. Boeing is currently contending with a labor strike, while trying to enhance production quality in its commercial aircraft division. On the defense side, the company faces profitability issues due to fixed-price contracts, compounded by ongoing inflationary pressures.
In conclusion, while the election may bring its share of uncertainty regarding defense stock valuations, the overarching trend remains one of resilience in the sector. As investors, prudence should guide your decision-making, allowing you to hold onto valuable shares while keeping an eye on the evolving political landscape. Regardless of whether Trump or Harris emerges as the victor, the demand for defense spending is likely to persist, yielding opportunities for both seasoned and new investors.
