The shares of major U.S. defense contractors have been on a downward spiral due to a global military boom that has seen European counterparts’ stock prices soar. This decline in the U.S. defense industry is largely attributed to the legislative deadlock in Washington, which has created uncertainty around government spending.
What Happened: The shares of top Pentagon contractors including Lockheed Martin Corp LMT and Raytheon Technologies Corp RTX have plummeted over the past year following Russia’s invasion of Ukraine, reported Financial Times. Meanwhile, European defense companies like Italy’s Leonardo SpA and Germany’s Rheinmetall AG have surged their shares.
Despite the US defense companies’ record order books, uncertainty over future government commitments has dampened their valuations. This uncertainty stems from the Pentagon and the rest of the U.S. government operating at last year’s spending levels due to Congress’s failure to pass the 2024 budget.
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Lawmakers have until March 22 to pass the 2024 defense budget, and until then, the Pentagon cannot initiate new procurement programs, and existing programs will slow down. The uncertainty also affects the Biden administration’s proposed additional spending of nearly $60 billion for Ukraine.
Why It Matters: The U.S. defense industry has been facing challenges, including rising costs and labor shortages, which have led to a reluctance among defense contractors to take on high-risk Pentagon projects. The Pentagon’s plan to reduce Lockheed Martin’s F-35 fighter jet orders by 18% for 2025 due to budget constraints has already raised concerns about the company’s future revenue.
This has directly impacted the industry’s performance, as seen in the recent decline of major defense contractors’ shares.
On the other hand, private defense contractors like SpaceX have been expanding their role in the U.S. defense industry, potentially reshaping the landscape for traditional defense contractors.
Photo courtesy: Lockheed Martin
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