In his farewell address, President Dwight Eisenhower famously warned the nation to “guard against the acquisition of unwarranted influence, whether sought or unsought, by the military-industrial complex.” Six decades later, that admonition remains as prescient as ever.
The recent conflict between Israel and Hamas has proven beneficial for defense stocks, despite a more generalised market downturn. Following the outset of the attacks, defense shares saw remarkable increases. Notably, on the first trading day following the Hamas attack, Raytheon, Lockheed Martin, and Northrop Grumman saw substantial gains of 5%, 9%, and 11% respectively. These companies, along with other major US defense contractors, added a combined $28 billion to their market capitalization within the first three trading days of the war.
Historically, such gains have been temporary, reacting directly to the presence of armed hostilities. However, there has been a noticeable difference this time. A week and a half into the conflict, the iShares Aerospace & Defense ETF, which tracks many leading defense companies, remained up by 7%, contrasting starkly with the virtually unchanged S&P 500 over the same period.
However, it is still too early to predict the long-term impact of the Israel-Hamas conflict on the financial health of defense contractors. Factors such as the possible spread of the war to other regions and the ability of the US Congress to pass President Joe Biden’s proposed 4% increase in defense spending notwithstanding its current dysfunction, will play a significant role in these future projections.
Eisenhower’s warning reminds us that the alliance between the military and industry should not unduly influence our actions or decisions. The ethical concerns surrounding profiting from a state of war are undeniably complex; thus the reminder of this dynamic’s influence over fiscal choices is continually needed.
For investors with money in defense industry stocks, the conflict in Gaza has provided a boost during a period of relative market stagnation. The hope, however, is for a less profitable period in the weeks ahead, for the sake of those affected by the ongoing conflict.