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2026-03-17 17:31:18
[Why are the five major defense giants holding back despite renewed tensions?] ⑴ The US-Iran conflict should have benefited US arms manufacturers, but since its outbreak, the stock prices of the five major defense giants have fallen by an average of about 1%, far below market expectations. Investors are cautious about this traditionally safe-haven sector, with multiple factors at play. ⑵ In terms of valuation, these stocks have already priced in significant growth expectations. Since the first presidential debate last June, the five giants have seen an average increase of about 50%, with four companies having an average forward P/E ratio of about 26, close to historical highs. High valuations mean that further gains require stronger catalysts. ⑶ Fundamental demand does exist, but the market has already priced it in. Even before the conflict, the Pentagon had signed multi-year production increase agreements with defense giants due to inventory shortages. European allies have raised their defense spending targets to 5% of GDP, and Trump has called for increasing the defense budget to $1.5 trillion in fiscal year 2027. ⑷ However, structural problems are emerging. Existing defense strategies are extremely costly; the expenditure on intercepting Iranian missiles and drones in the first four days alone approached $11 billion, with interceptor missiles costing approximately $5.7 billion. Using missiles costing millions of dollars to intercept drones costing thousands of dollars—this asymmetric cost is prompting the US military to seek more cost-effective alternatives. (5) A subtle shift in technological priorities is underway. The Trump administration increased budgets for new technologies such as space, artificial intelligence, and drones by more than 20%, while spending on traditional projects remained largely flat. The new administration is more inclined to introduce more commercial solutions and new entrants, posing a challenge to established giants. (6) Policy risks cannot be ignored. Earlier this year, Trump signed an executive order prohibiting defense contractors from distributing dividends or repurchasing products before delivering quality products on time and within budget. This will drive up capital expenditures, putting pressure on earnings per share in the short term.
