Against the backdrop of escalating international crises and intensifying rivalries that, in some cases, have ignited wars and regional conflicts, the financial landscape for major military stocks in 2023 has delivered unexpected results. Despite the conventional expectation that these defense industry giants would thrive in times of turmoil, the reality is different.
In particular, data acquired and calculated by Finbold indicates that between January 1, 2023, and October 11, 2023, selected major military stocks recorded a cumulative outflow of $98.08 billion in market capitalization. In January 2023, these ten major stocks boasted a cumulative market cap of $665.48 billion, which dwindled to $567.40 billion as of October 2023.
Raytheon Technologies (NYSE: RTX) emerged as the biggest loser, shedding $41.60 billion in market capitalization after beginning the year with a market cap of $148.36 billion. Following closely, Lockheed Martin (NYSE: LMT) saw the second-largest decline in market cap, losing $17.93 billion. Northrop Grumman (NYSE: NOC) recorded the third-highest losses, totaling $13.61 billion in market cap.
Boeing (NYSE: BA), which started the year with a market cap of $126.94 billion, lost $10.21 billion in capitalization. Other notable losers include General Dynamics (NYSE: GD) at $3.50 billion and Leidos (NYSE: LDOS) at $1.43 billion.
Among the top 10 selected major military stocks, Rheinmetall (RHM.F) was the only exception, gaining $3.16 billion, with its market cap increasing from $9.20 billion to $12.36 billion.
Driving factors behind military stock outflows
In an industry that traditionally thrives during times of global unrest, the outflow in the market cap of military stocks may come as a surprising turn of events, especially in light of the ongoing major conflicts such as Russia’s invasion of Ukraine, which ranks at the forefront. Notably, the complex web of arms manufacturers, defense contractors, and government interests has historically thrived in times of conflict.
As the world grapples with the aftermath of the Ukraine invasion, the global economy is simultaneously witnessing the resurgence of conflict in the Middle East following an attack on Israel by the Gaza-based militant group Hamas. While this conflict is still in its early stages, it presents an intriguing narrative regarding its potential impact on the defense industry. As military stocks surged in the initial stages of the conflict, questions linger about their sustainability.
It is also worth noting that the United States defense budget has been one of the critical drivers of the defense stocks. In particular, the stocks have plunged despite the intention of the US to increase its aid to Ukraine with plans to offer similar support for Israel. However, in light of the priorities the US defense budget sets, securing additional monetary allocations may prove challenging, particularly given the nation’s intent to support Ukraine and Israel at the same time. The prospects of expanding the budget are unlikely, given the stalemate in Congress and the relatively small scale of the Israel-Hamas conflict at its current stage.
The outflow reflects the lackluster performance of military stocks in 2023, primarily influenced by factors like budget uncertainties. Key markets such as the United States and Europe have witnessed government budget tightening. In the wake of the financial fallout from the pandemic, governments are diverting investments toward sectors like healthcare and infrastructure, impacting major military contractors’ revenue and growth potential.
Other factors contributing to the decline in military stocks include shifting ethical considerations, with a growing emphasis on sustainability and social responsibility, which have prompted investors to avoid arms-producing companies. Geopolitical uncertainties make military investments riskier due to concerns about potential financial losses in the event of conflicts. Technological advances have redirected funds to renewable energy and AI sectors, offering better returns and growth potential.
Each company’s specific case
It’s important to acknowledge that each company in the defense sector faces distinct challenges. For instance, Boeing’s defense unit grapples with persistent issues tied to fixed-price defense contracts that have incurred significant losses, partly due to inflation and supply chain constraints that have elevated costs. Ongoing developmental hurdles for specific programs have compounded this.
In contrast, Raytheon Technologies unveiled plans to consolidate its defense divisions into a single unit as part of a cost-cutting reorganization, leveraging the strength of its commercial businesses.
Meanwhile, Rheinmetall has experienced notable success in 2023, sustaining its growth momentum from the Russian invasion of Ukraine in early 2022. This growth is primarily attributable to the rearming and refocusing on military initiatives in Germany, throughout Europe, and worldwide.
Finally, the outflow from military stocks raises questions about the sector’s adaptability to changing investor priorities. While defense contractors have shown adaptability historically, their evolution in response to investor shifts is still being determined. However, this shift doesn’t spell the end of the military-industrial complex; some investors still value its stability. Governments worldwide maintain substantial defense budgets, ensuring the sector’s persistence.