In the recent rotation of the US stock market, a potential winner is quietly emerging: military stocks.
Boosted by the increasingly tense geopolitical situation and a series of strong quarterly financial reports, US military stocks have achieved their best monthly gains in nearly two years - the S&P 500 Aerospace and Defense Index, which tracks the sector, rose 9.2% in July, the largest monthly increase since October 2022, far exceeding the 1.1% increase of the S&P 500 index during the same period.
In July, the biggest winner in the index was engine and fastener supplier Howmet Aerospace, whose stock price rose 23% cumulatively that month.
Other companies with the highest increases include defense contractors such as Raytheon Technologies (RTX), Northrop Grumman, and Lockheed Martin, as well as military shipbuilding company Huntington Ingalls Industries. These five companies recently announced quarterly profits and revenues that exceeded expectations, highlighting strong demand.
The recent surge in the military industry stock market coincides with investors actively withdrawing from large tech stocks and turning to some underperforming sectors in the US stock market this year, such as small cap stocks and non tech companies. This clearly provides additional momentum for the rise of military industry stocks.
Of course, perhaps even more crucial is the further escalation of global geopolitical tensions, constantly stimulating demand for defense and military products, whose manufacturers benefit from being tied to government spending.
There are multiple driving factors for this sector, "said Michael O'Rourke, Chief Market Strategist at Jongstrading." In addition to value stocks and profit growth being favored, global conflicts are also intensifying due to the need for government approvals and contracts, and high entry barriers typically result in these stocks gaining more premium multiples
Global geopolitical tensions continue to escalate
In July, the situation in the Middle East continued to deteriorate, with ongoing military conflicts and attacks between Israel and Hezbollah in Lebanon. On the last day of July, Hamas leader Ismail Haniya was attacked and killed in the Iranian capital Tehran, which quickly shocked the world.
On the battlefield between Russia and Ukraine, insiders have revealed that the first batch of F-16 fighter jets provided by NATO countries have arrived in Ukraine, which may enhance Ukraine's ability to resist Russian attacks. According to informed sources, the delivery deadline for US made fighter jets is the end of July, and this deadline has been complied with.
These constantly burning 'wars' on the battlefields of the Middle East and Eastern Europe will undoubtedly maintain the global demand for military companies producing defense products such as combat aircraft, missiles, and weapon systems. Yardeni Research's analysis shows that factory production in the defense and aerospace sectors reached a historic high in June, helping to drive steady growth in US industrial production.
Eric Wallerstein, Chief Market Strategist at Yardeni Research, said, "These products mainly come from defense contractors, have high technological content, lack demand elasticity, and are not sensitive to interest rates because the US government is the buyer
Wallerstein added, "We expect that the tense geopolitical situation will continue to be a driving force for the performance of defense stocks