What’s going on here? Basically, two things.
First, there’s the very real expectation that we’re about to experience a global wave of defence contracts. Under pressure from Trump, North Atlantic Treaty Organisation (NATO) leaders agreed in June to increase defence spending to 5 per cent of GDP, up from a previous spending goal of 2 per cent.
Markets speculate that the shift will unfold over a decade or so, and that a substantial part of the windfall will flow to US contractors – although European defence has also benefited in the trade.
Then last time defence stocks boomed like this was under George W. Bush and his vice president, former defence industry executive Dick Cheney (left).Credit: AP
Furthermore, there’s evidence that major Asian allies – having seen that the US security umbrella isn’t what it used to be – intend to follow European peers and increase defence spending in their regions as well.
Wall Street analysts have started to incorporate those outcomes into their earnings projections, which suggest aerospace and defence earnings per share will jump 56 per cent this year; 22 per cent in 2026; and 16 per cent in 2027. But at the rich forward earnings multiples that investors are paying, the market seems to think that even those estimates are conservative.
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The second part of the story is that defence stocks seem to be, very simply, in vogue with the retail crowd. These stocks have attained a special — albeit potentially fleeting? — cultural resonance in Trump’s America, where Secretary of Defence Pete Hegseth now prefers to go by the title “secretary of war” and public health centres around pushups rather than vaccines.
Domestically, the macho cultural turn has been marked by a rejection of sensitivity and “wokeism.” Abroad, it’s been marked by an eschewing of soft-power diplomacy and a return to nuclear tests. And in the stock market, it will be remembered as the time when Palantir Technologies, a company using AI to optimise the “kill chain” for US soldiers in the battlefield, commanded a market value of $US476 billion ($724 billion) at the time of writing – about 247 times its blended forward earnings.
Since it’s a software company, Palantir isn’t technically part of the aerospace and defence index that I referenced earlier. Rather, it’s the leading example of “defence tech,” an investing theme that has managed to find itself at the intersection of defence and AI, a combination that retail investors these days simply can’t resist.
All of this has left a non-negligible impact on the US stock market as a whole. It’s usually easy to roll your eyes when Trump tries to take credit for the market (as I did recently when he posted on Truth Social — in all capital letters — that the market was stronger than ever because of his ill-advised tariff escapades).
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But in the case of defence stocks, the Trump effect is hard to deny. Including aerospace and defence and other “defence tech” shares in software and professional services, I estimate that the Trump defence trade has been worth around 1.2 percentage points of the S&P 500’s 14.1 per cent gain since his inauguration day. Nothing to sneeze at.
Of course, the real question is whether a rally in defence stocks is generally a good thing.
For all the merits of defence cost sharing within NATO, it’s impossible to shake the feeling that we’re drifting toward a more confrontational world – and the development of an investing sub-culture that seems to celebrate that.
And the fact that this is happening under “the Peace President” just makes it that much worse.
Jonathan Levin is a columnist focused on US markets and economics. Previously, he worked as a Bloomberg journalist in the US, Brazil and Mexico. He is a CFA charterholder.
Bloomberg
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