Contrary to expectations, the securities of the largest defense corporations in the US and Europe have sharply decreased in value. Investors are actively shedding assets, even though geopolitical tensions, including the conflict in the Middle East, persist.
At the end of February, immediately after the American strikes on Iran, the stocks of giants such as Lockheed Martin, Northrop Grumman, RTX, L3Harris, and General Dynamics began to decline rapidly. The market reacted instantly to the production crisis, as the actual needs of the front significantly exceed the current capacities of factories.
According to experts, over the past two months, the US military has used about 1,000 Tomahawk missiles against Iran. This number is 20 times greater than the volume of missiles for which the US Navy allocated budget funds this year.
The Chief Investment Officer of Grey Value Management, Steven Gray, clarifies the situation, noting: "The US is consuming munitions much faster than we can produce them. Defense companies can receive a certain amount of money in advance, but usually, they do not make a profit until they place an order. If delivery takes time, why should stock prices rise more than they already have due to profits that will not be realized for years?"
Market Paradox: "Buy Tension, Sell War"
Investors have radically revised their strategies, and funds have begun to be actively withdrawn from defense funds. For example, nearly $1 billion was withdrawn from the iShares US Aerospace & Defense ETF, valued at $14 billion. Capital is now being directed to more reliable sectors, such as energy and utilities.
Melius Research analyst Scott Mikus characterizes the situation as a classic market dynamic: "This is what we call the 'buy tension, sell war' dynamic." A similar situation was observed in the world during the invasion of Iraq in 2003 and after the start of Russia's large-scale invasion of Ukraine in 2022.
Stocks of Lockheed Martin and RTX, which previously showed annual growth of up to 50%, have now fallen by 5-10%.
Trump Promises $1.5 Trillion, but the Market Doubts
Donald Trump proposed to increase the US defense budget to $1.5 trillion by 2027. This is 50% higher than current spending; however, investors are not enthusiastic about buying stocks.
Bank of America analyst Ron Epstein emphasizes that the key issue is not funding but production capacities. Factories simply cannot cope with the increased load.
Europe is Also Losing Ground
The crisis wave has not spared the European defense industry market either. In March, the MSCI Europe Aerospace Index showed a decline of 9.2%, marking the worst result in the last five years.
Among the companies that showed the largest declines were German Rheinmetall with a drop of 10%, Swedish Saab, which lost 12%, and Czech CSG, whose stocks plummeted by almost a third.
Analysts suggest that the defense sector may have reached its peak development. Weapons manufacturers are facing a completely new reality: modern conflicts require mass production of inexpensive drones rather than exclusively expensive missiles.
Leave a comment