Jan 8, 2020

Middle East tensions could spark a big year for defense stocks

Dion Rabouin, author of Markets
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Data: Money.net; Chart: Axios Visuals

Defense sector stocks have predictably seen major buying since the killing of Iran Gen. Qasem Soleimani, in particular Northrop Grumman and Lockheed Martin.

Why it matters: The gains may not be temporary, analysts say.

  • “These companies all have large portfolios of products and capabilities that will be in high demand from both their domestic and regional markets," GlobalData's head of research for strategic defense Daniel Jones says.
  • “These gains will likely be sustained in the near term, given how politically untenable it will be to reduce defense expenditure at a time of heightened tensions during an election year.”

Plus, Moody's projected a bullish year for the sector in its 2020 outlook, expecting it to outperform the broader stock market, even before tensions between the U.S. and Iran flared.

  • Analysts outlined an expectation for commercial aircraft deliveries to ramp up and defense spending to grow, thanks to major spending increases from the Trump administration.
  • The grounding of Boeing's 737 MAX also weighed down 2019's earnings, providing space for a strong recovery in the sector.
  • "Our profit growth forecast excluding Boeing is 7% in 2020 and 6% in 2021," analysts wrote in December.

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