By Jon Sindreu

Investors are betting that Donald Trump's rhetoric about not getting involved in foreign wars won't hit defense stocks. They may be getting ahead of themselves.

Defense stocks were gaining Wednesday after Trump's victory in the presidential election. The biggest winners were among European military contractors, which have become part of the "Trump trade," based on the belief that greater U.S. isolationism will pressure other NATO nations to boost their defense spending.

Shares in Britain's BAE Systems, Germany's Rheinmetall, France's Thales and Italy's Leonardo all rose more than 2.5%. The S&P 500 gained around 2% while the Stoxx Europe 600 fell.

Pentagon contractors based in the U.S. also outperformed, including General Dynamics and L3Harris. This seems to go against Trump's public apprehension about continuing to fight foreign wars, particularly the conflict in Ukraine.

The rally could partly reflect Trump's pledge to further cut corporate taxes, which would be a boon for all corporations. Support for Israel in the war in Gaza and heightened tensions with China could also push his administration to keep investing in modernizing military technology.

Meanwhile, direct gains from the war in Ukraine for American defense firms have been small. Much of the hardware shipped to Eastern Europe came from existing stockpiles.

Nevertheless, defense-stock valuations are already elevated. And a second Trump presidency is likely to come with more tariffs, which could reduce exports and increase costs for internationally exposed companies.

Moreover, a Republican sweep remains possible, and several conservative members of the House blocked funding for the Pentagon last year. With budget deficits likely to balloon because of the tax cuts, lawmakers may have even more incentives to try to curtail military spending.

Trump's victory is certainly no disaster for U.S. defense companies. It is still hard to explain why they are doing better than the broader stock market.

-Krystal Hur contributed to this post.

This analysis comes from the Journal's Heard on the Street team. Subscribe to their free daily afternoon newsletter here.

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(END) Dow Jones Newswires

November 06, 2024 12:30 ET (17:30 GMT)

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