What a Trump or Harris Win Would Mean for Boeing Stock and Other Defense Names

The U.S. presidential election is quickly approaching, and the outcome will undoubtedly have significant repercussions for defense stocks, particularly in late 2024 and into 2025. With the stakes high, investors in companies like Boeing should take notice. Fortunately for them, there seems to be little reason for concern regarding overall defense spending levels, which primarily influence the sales and earnings performance of defense firms.

There are, however, crucial policy differences between former President Donald Trump and Vice President Kamala Harris that are worthy of investor scrutiny. As outlined by Truist analyst Michael Ciarmoli in a recent report, this marks the fifth presidential election he has covered related to the defense industry. Throughout his career, he has witnessed shifting political parties, wars beginning and ending, budget controls, tax law amendments, and changes in national defense strategies. Despite these volatile factors, Ciarmoli remains optimistic about global defense spending, citing the elevated global threat landscape and the pressing need to modernize U.S. military capabilities.

The Impact of Tax Policy on Defense Stocks

One of the more immediate concerns for investors will be tax policies, particularly since defense contractors are primarily based in the U.S. and generate most of their revenue from domestic sales. This makes them highly sensitive to fluctuations in corporate tax rates. Under Trump’s proposed tax plan, rates would be slashed from 21% to 15%. Conversely, Harris advocates for increasing the rates to 28%. According to Ciarmoli’s analysis, Trump’s tax plan could potentially lift the value of defense stocks by nearly 10% on average, while Harris’ proposal could decrease their value by a comparable margin.

Price-to-Earnings Ratios: A Historical Perspective

Investors should also closely monitor price-to-earnings (P/E) ratios as they assess their defense stock investments. Historical analysis reveals that since 1980, defense stocks have generally traded at about 90% of the S&P 500 P/E ratio in the year following an election. Notably, under Republican administrations, defense shares typically matched the broader market’s P/E ratio. However, under Democrats, that discount expands, with defense stocks settling at about 80% of the S&P 500 multiple. While this trend presents a challenge for investment strategy, it indicates a historical perception among investors that Republicans tend to be better for the defense sector.

Performance and Outlook for Defense Stocks

Over the past six administrations—three Republican and three Democratic—defense stocks have generally outperformed the S&P 500 index. In this context, returning to Ciarmoli’s insights, he suggests that investors may want to consider taking profits on defense stocks in 2025 regardless of the election outcome. Until then, there are no substantial reasons to implement drastic portfolio changes.

As of the latest trading data, key defense contractors like Lockheed Martin, Northrop Grumman, L3Harris Technologies, and General Dynamics have shown robust growth, with their shares climbing an average of 33% over the past year. In comparison, the S&P 500 is up approximately 34% during the same timeframe. Among large defense contractors, General Dynamics has garnered considerable favor among analysts, with around 71% recommending it as a Buy. For context, the average Buy rating ratio across S&P 500 stocks hovers around 55%, while L3Harris, Lockheed, and Northrop display ratios of 52%, 48%, and 37%, respectively. Boeing, another major player in the defense sector, currently holds a Buy rating ratio of 59%.

Boeing: A Special Situation

As it stands, Boeing stock is described as a “special situation” by Vertical Research Partners analyst Rob Stallard. This designation implies that internal issues within the company may exert more influence on its stock performance than broader market trends. Boeing is currently navigating various challenges, including a labor strike and efforts to improve production quality within its commercial aircraft division. Additionally, its defense sector faces profitability issues linked to fixed-price contracts, which have been adversely affected by years of unexpectedly high inflation.

In conclusion, while the outcome of the presidential election will undoubtedly have implications for defense stocks, the overall outlook remains cautiously optimistic. Given the significance of tax rates and historical P/E trends, investors would be wise to remain vigilant and strategic as they assess their investments in Boeing and other defense firms in the months to come.