The Impact of Israel-Hamas Conflict on Defense Stocks: A Lucrative Investment Opportunity
During times of conflict, defense companies thrive, leading to increased profits in aerospace and defense stocks amidst geopolitical unrest
This story was initially published in CNN Business Before the Bell newsletter. Don't miss out! Subscribe now by clicking on the provided link. You can also access an audio version of the newsletter through the same link.
In times of war, defense companies typically experience financial gains. As a result, aerospace and defense stocks tend to see an increase in value during periods of geopolitical instability.
Shares of military contractors experienced a significant increase right after the Israel-Hamas War, as indicated by research from VandaTrack. Both institutional and retail investors showed interest by purchasing these shares. The iShares U.S. Aerospace & Defense ETF, which monitors companies such as Raytheon, Lockheed Martin, Boeing, General Dynamics, and Northrop Grumman, has seen a surge of around 7% since the initial attacks on Israel in the previous month.
During a recent earnings call, Lockheed Martin executives emphasized the Israel and Ukraine conflicts as potential catalysts for higher revenue in the years ahead. According to Jim Taiclet, chairman, president, and CEO of Lockheed Martin Corporation, the evolving global threat environment and escalating geopolitical circumstances have become more worrisome and demanding. Consequently, the United States and its allies worldwide are shifting their focus towards strengthening national defense in a progressively significant manner.
Some Wall Street leaders are expressing concerns about the potential for the conflict to escalate beyond Israel and Hamas. JPMorgan Chase CEO, Jamie Dimon, warned investors on Friday that the current situation could be the most dangerous the world has seen in decades. Dimon emphasized that both the Israel-Hamas war and the conflict in Ukraine could have significant impacts on energy and food markets, global trade, and geopolitical relationships.
Sam Stovall, the chief investment strategist at CFRA, also drew attention to previous instances where conflicts in the Middle East had a negative impact on the US economy. Stovall mentioned the Yom Kippur War in 1973 and Iraq's invasion of Kuwait in 1990 as examples of events that triggered or worsened recessions and bear markets.
Despite the recent growth in share prices, defense stocks have had a challenging year due to the uncertain status of President Joe Biden's proposed budget. The budget includes a 4% increase in defense spending to $814 billion, but it remains in limbo as Congress must pass an appropriations bill or another continuing resolution by November 17 to prevent a government shutdown. Despite recent gains, the S&P 500 aerospace and defense index has lost approximately 8.5% this year. Furthermore, the latest gains may not last long, as defense stocks tend to rise after military conflicts but quickly lose those gains.
After Russia invaded Ukraine, the iShares defense ETF experienced a 5% surge, while shares of Lockheed Martin and Northrop Grumman jumped by approximately 20%. However, these stocks eventually regressed within six months, resulting in the loss of most of their gains.
According to Raffi Boyadjian, an analyst at XM, if the conflict remains localized between Israel and the Palestinians, it is probable that the markets will quickly forget about it within a few days. He also mentioned that while a significant increase to the US defense budget could potentially drive a sustained rally, this is unlikely due to Congressional challenges and the limited extent of the Israel-Hamas conflict.
Meanwhile, investors appear undisturbed as the yield on 10-year Treasury notes reached a level not seen in 16 years on Tuesday. Traditionally, rates tend to decline during prolonged conflicts as traders seek refuge in safer assets. The stability in crude futures suggests that investors do not anticipate the conflict to extend to nations rich in oil.
Goldman Sachs CEO stops doing controversial DJ gigs
Lollapalooza is about to undergo a drastic change.
Confirming a report, a spokesperson from Goldman Sachs, the second-largest investment bank, announced that David Solomon, their CEO and renowned party DJ, has chosen to prioritize Wall Street over South Beach, thus discontinuing his performances at prominent events.
According to Tony Fratto, a spokesman for Goldman Sachs, David made the decision to cease his public DJing over a year ago due to the excessive external focus on it. Solomon, known by his DJ alias DJ D-Sol, started playing music at festivals and in nightclubs a couple of years ago. In a Goldman Sachs podcast in 2017, the 61-year-old Solomon mentioned that he unintentionally got into DJing as a hobby, and now he continues to do it solely for enjoyment.
Solomon's unconventional pastime may have perplexed board members who questioned why he couldn't simply adopt golf. However, it is not the primary factor that has landed the Goldman chief in trouble of late. According to reports, former and current colleagues have accused the bank executive of inadequate leadership, while former chairman and CEO Lloyd Blankfein has allegedly raised concerns about his ability to effectively manage the company.
Despite the 8.4% decrease in shares of Goldman Sachs (GS) this year, they have seen a significant increase of approximately 40% since Solomon assumed leadership in 2018. In their recent third-quarter announcement, Goldman Sachs revealed earnings of $5.47 per share, surpassing analysts' expectations of $5.31. Moreover, their revenue reached $11.82 billion, surpassing the expected $11.19 billion, according to Refinitiv data.
Still, profit fell by 33% from a year earlier.
Elon Musks X is testing an annual fee for unverified accounts
Elon Musk's recent suggestion that X may implement user charges has led the company (previously referred to as Twitter) to announce a trial of this system. In a recent announcement, X revealed that they are currently experimenting with a program titled "Not a Bot." This initiative will require new users from New Zealand and the Philippines to register for a $1 annual subscription in order to create posts and engage with other content.
According to my colleague Clare Duffy, the test will only be applicable to newly created web accounts. If users choose to subscribe to X's premium service at $3.99 per month, they will not have to pay the fee. However, new users in the testing region who decide not to opt for the premium subscription or the annual subscription will only have access to reading posts, watching videos, and following accounts. They will not be able to interact on the platform. Existing users will not be impacted by this test.
The company stated that the purpose of the program is to enhance their existing successful initiatives in combatting spam, platform manipulation, and bot activity. They aim to strike a balance between platform accessibility and the minimal fee, clarifying that the fee is not intended to generate profit.
