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What the Israel-Hamas war means for defense stocks

2023-10-18 19:20
When war breaks out, defense companies tend to make money. That means aerospace and defense stocks tend to rise during geopolitical unrest.
What the Israel-Hamas war means for defense stocks

When war breaks out, defense companies tend to make money. That means aerospace and defense stocks tend to rise during geopolitical unrest.

In the immediate aftermath of the Israel-Hamas War, shares of military contractors spiked as both institutional and retail investors bought in, according to VandaTrack research.

The iShares U.S. Aerospace & Defense ETF, which tracks companies including Raytheon, Lockheed Martin, Boeing, General Dynamics and Northrop Grumman, has surged by about 7% since the initial attacks on Israel earlier this month.

What's happening: On a recent earnings call, Lockheed Martin executives highlighted the Israel and Ukraine conflicts as potential drivers for increased revenue in the coming years.

"In the longer term there are some things that are changing significantly. One is the global threat environment and the geopolitical situations getting more concerning and challenging," said Jim Taiclet, chairman, president and CEO of Lockheed Martin Corporation on Tuesday. "That's refocusing the US and certainly our allies around the world on national defense in an increasing manner."

Some Wall Street titans are also concerned about the possibility that the conflict could widen beyond Israel and Hamas. JPMorgan Chase CEO Jamie Dimon told investors on Friday that "now may be the most dangerous time the world has seen in decades." The Israel-Hamas war and the war in Ukraine, he said, "may have far-reaching impacts on energy and food markets, global trade and geopolitical relationships."

Sam Stovall, chief investment strategist at CFRA, also pointed out that there have been several instances of conflict in the Middle East "that triggered or exacerbated US recessions and bear markets, such as the Yom Kippur War in 1973 and Iraq's invasion of Kuwait in 1990."

Strong gains, loosely held: Despite the recent growth in share prices, defense stocks have faced a challenging year. What's making things especially difficult for defense contractors is that President Joe Biden's proposed budget, which includes a 4% increase in defense spending to $814 billion, remains in limbo, since Congress must act by November 17 to pass an appropriations bill or another continuing resolution to prevent a government shutdown. So far this year, the S&P 500 aerospace and defense index has lost about 8.5%, even with the recent gains.

And even the latest gains could be short lived. Defense stocks typically rise after military conflicts but soon lose those gains.

Following Russia's invasion of Ukraine, the iShares defense ETF surged by 5%, with Lockheed Martin and Northrop Grumman's shares jumping about 20%. But within six months, these stocks reverted, losing most of their gains.

"If the war remains confined between Israel and Palestinians, it's likely that the markets will forget about it after a few days," said Raffi Boyadjian, an analyst at XM. A significant increase to the US defense budget could drive a sustained rally, he said, but that's unlikely due to Congressional challenges and the limited scope of the Israel-Hamas conflict.

Meanwhile, investors seem unfazed. The 10-year Treasury note's yield neared a 16-year high on Tuesday. Typically, rates drop during extended conflicts as traders opt for safer assets. Steady crude futures suggest investors aren't anticipating the conflict to spread to oil-rich nations.

Goldman Sachs CEO stops doing controversial DJ gigs

Lollapalooza will never be the same.

Goldman Sachs chief executive (and noted party DJ) David Solomon will no longer perform at high-profile events, picking Wall Street over South Beach, a representative from the second-largest investment bank confirmed to CNN.

"David decided to stop publicly DJing more than a year ago because of the outside attention to it," said Goldman spokesman Tony Fratto.

Solomon, who performed under the alias DJ D-Sol, began spinning tracks at festivals and in night clubs a few years ago. "[I] kind of stumbled into it as a hobby, and now I just do it for fun," Solomon, 61, said on a Goldman Sachs podcast in 2017.

Solomon's unorthodox hobby likely caused some head scratching from board members who wondered why he couldn't just take up golf, but it's not the main reason the Goldman chief has found himself in hot water lately.

The bank executive, who is celebrating five years at the top, is reportedly being accused by former and current coworkers of poor leadership, and his ability to effectively run the company is also reportedly being questioned by former chairman and CEO Lloyd Blankfein.

But Solomon ultimately answers to shareholders, the bank's board of directors and the bottom line. And while shares of Goldman Sachs (GS) may be down by more than 8.4% this year, they're still up by about 40% since he took over in 2018.

Goldman Sachs announced third-quarter results on Tuesday morning, reporting earnings of $5.47 per share, which beat the $5.31 expected by analysts. Revenue clocked in at $11.82 billion versus the $11.19 billion expected, according to Refinitiv data.

Still, profit fell by 33% from a year earlier.

Elon Musk's X is testing an annual fee for unverified accounts

After Elon Musk hinted last month that X could start charging all users, the company (formerly known as Twitter) announced a test of such a system.

X said in a post on Tuesday that it is testing a new program called "Not a Bot" in which new users in New Zealand and the Philippines will be required to sign up for a $1 annual subscription to post and interact with other posts.

The test will apply only to new web accounts, and the fee will be waived if users sign up for X's $3.99 per month premium subscription service, reports my colleague Clare Duffy.

New users in the testing region who opt out of premium and the annual subscription will only be able to read posts, watch videos and follow accounts — but not interact on the platform. Existing users will not be affected as part of the test.

The company said in the post that the program is meant to "bolster our already successful efforts to reduce spam, manipulation of our platform and bot activity, while balancing platform accessibility with the small fee amount," adding that the fee is not meant to be a profit driver.