In the past, a GOP sweep has often led to strong gains for defense stocks. However, the historical trend may not hold true this time around. According to Wells Fargo analyst Matthew Akers, the defense sector tends to outperform when there is a single party in control across Congress and the executive branch, especially the Republican Party. Under a GOP-controlled government, defense stocks have outperformed the S & P 500 by more than 12 percentage points, while under a Democrat-led government, the sector beats the broad market index by nearly 6 percentage points.
Although polls indicate that former President Donald Trump has an edge in the upcoming election against President Joe Biden, Akers believes that the defense sector may not benefit as much from a Republican sweep this time. Trump’s skeptical outlook on NATO could result in decreased weapons funding for Ukraine, potentially impacting the defense sector negatively. Additionally, Republican control of both branches of the legislative branch could lead to budget cuts for federal IT revenue. Akers pointed out that passing budgets with a strong Republican majority might be challenging due to the need to balance various interests within the party.
While Akers is cautious about the potential impact of a Republican sweep on the defense sector, TD Cowen has a more positive outlook. The firm believes that a Trump presidency would be beneficial for defense companies. Despite possible cuts in overseas defense and emergency spending, TD Cowen sees ongoing opportunities for growth in the defense sector. The firm highlights the Republican Party’s platform, which emphasizes a strong military and “made in America” defense systems as positive factors for defense stocks.
Performance of Defense Stocks in the Current Market
The iShares U.S. Aerospace & Defense ETF (ITA) has not performed as well as the broader market this year, rising only 7.7% compared to the S & P 500’s 18% gain. The disparity in performance indicates some uncertainty and caution in the market regarding the future of the defense sector. The upcoming election and potential changes in political control could further impact the performance of defense stocks in the near future.
The relationship between political control and the performance of defense stocks is complex and multifaceted. While historical trends suggest a positive correlation between a GOP sweep and defense sector gains, the current political landscape and global challenges pose uncertainties for investors. It is essential for investors to carefully consider the potential impact of political changes on defense stocks and to stay informed about the latest developments in the market.