Shares of US and EU arms giants unexpectedly went down. Investors have started selling assets en masse, despite the protracted conflict in the Middle East and huge Pentagon spending. This is reported by RBC-Ukraine with reference to the Financial Times analyst.
Share prices of leading corporations, such as Lockheed Martin, Northrop Grumman, RTX, L3Harris and General Dynamics, began to fall immediately after the U.S. strikes on Iran in late February. The market reacted to the production stalemate, because the situation on the frontline is outpacing the capacity of the factories. Analysts estimate that the U.S. military has used about 1,000 Tomahawk missiles against Iran in the past two months. This figure is 20 times the number of missiles that the US Navy has allocated funds for in this year’s budget.
Grey Value Management Chief Investment Officer Stephen Grey explains the situation this way:
“The US is using up munitions much faster than we can produce them. Defense companies may get a certain amount of money upfront, but they usually don’t make a profit until they bid. If delivery takes time, why should stock prices rise more than they already have because of profits that won’t be realized for years?”
The paradox of the arms market: “buy tension, sell war.”
Investors changed strategy and money started flowing out of defense funds. Almost $1 billion was withdrawn from the iShares US Aerospace & Defense ETF alone, worth $14 billion. Capital is moving to safe havens: energy and utilities.
Melius Research analyst Scott Mikus calls this classic market dynamics/ “This is what we call the ‘buy tension, sell war’ dynamic,” the expert clarifies.
The world has already seen a similar pattern during the invasion of Iraq in 2003 and after Russia’s large-scale invasion of Ukraine in 2022. Shares of Lockheed Martin and RTX fell by 5-10%, although earlier they showed annual growth of 50%.
Donald Trump has proposed increasing the U.S. defense budget to $1.5 trillion for 2027. That’s 50% more than current spending, but investors are in no hurry to buy stocks. But according to Bank of America analyst Ron Epstein, the problem isn’t even money, it’s factories. Production capacity simply can’t keep up with the load.
Europe is also losing ground
The crisis has also affected the European market. MSCI’s European aerospace index fell by 9.2% in March. This is the worst index for the last five years. Among the leaders of the fall: German Rheinmetall (- 10%), Swedish Saab (-12%), Czech CSG (minus one third of the nominal value).
Analysts suggest that the defense sector has peaked. Arms manufacturers are facing a new reality: war requires cheap drones, not just expensive missiles.
