The Hamas terrorist attack on October 7th and the ensuing fallout, as horrible as it was, was a stark reminder of the precarious state of global geopolitics. The risk of a broader conflagration is high and rising, with the potential to bring in allies on both sides and to become a global hotspot. This would add a third region of concern to the list of ongoing and potential conflicts, on top of Ukraine and the China-Taiwan tensions.
Similar assistance is being offered to Israel — President Biden recently addressed the nation, calling for US$106 billion in additional military and other aid to be budgeted to help the country, and Ukraine, in their fights. The U.S. is also transferring equipment to Israel, such as beefing up the Iron Dome missile defense system.
The results are more interesting on a regional basis. The U.S. and Europe account for the two largest areas in this sector, with a notable divergence as the latter is vastly outperforming the former . At a time when markets are bracing for flat-to-negative earnings growth this year, investors in the Aerospace & Defense sector are expecting EPS growth anywhere from +15% to a whopping +96% . Even in the case of U.S. large caps, which remain the laggard with a slight negative EPS estimate revision over the past three months, the consensus is still penciling in an above-market expectation of +36% growth.
What jumps out in our analysis is how badly U.S. large cap Aerospace & Defense stocks have underperformed their peers despite equally attractive valuation/fundamental support. We would expect a catch-up trade on this front, and this presents as perhaps the most interesting opportunity .