The deterioration of U.S. and Ukraine relations is troubling for military stocks. The Trump Administration contrasts with that of Biden’s team. Instead of supplying equipment, logistics, and support to Ukraine, the U.S. has further demands.
In the last three years since the war started on Feb. 24, 2022, the U.S. supplied equipment to Ukraine. European countries and Japan increased their military spending after recognizing Russia’s threat to security. As a result, this helped defense contractors like L3 Harris (LHX), Lockheed Martin (LMT), Boeing (BA), Northrop Grumman (NOC), RTX (RTX), and AeroVironment (AVAV).
Since the U.S. elections in Nov. 2024, military stocks slumped sharply. Investors priced in the risk of the U.S. decreasing or entirely cutting off support. Investors need to watch the deteriorating relations between Ukraine and the U.S. closely. Recently, the U.S. held discussions with Russia without Ukraine or European countries. Ukraine will need to manage the risk of being isolated.
Last week, Ukraine President Zelenskyy said that the U.S. president lived in a “Russian disinformation bubble.”
Investors need to monitor the U.S. concessions it is making with Russia well before official peace talks. Currently, Russia believes it is winning the war, so any concessions are a bonus. This is a negative development for defense contractors.
Your Takeaway
The selling pressure for military stocks will continue. Consider lowering the weighting in this sector until spending for equipment increases again.
