Ask the CEO of a defense company about the prospect of defense spending slowing or flattening and the answer is typically this: The number of threats is growing and there’s bipartisan support for military spending. You could also throw in a line about Congress being supportive of Company X’s programs.
Defense spending in 2021 is expected to flatten or decline, even if President Trump is reelected. But what if a Democrat wins?
With such a diverse group of candidates, from far-left leaning to moderate, it’s tough to say, but Wall Street analysts are starting to opine on the topic as Sen. Bernie Sanders, a self-described Democratic socialist, has emerged as the frontrunner going into next week’s Super Tuesday primaries.
“Just as Trump didn’t moderate his views and behavior, we doubt that the 78-year old Sanders would move to centrist positions if elected,” Byron Callan, an analyst with Capital Alpha Partners, wrote in a Feb. 26 note to investors.
“He has stated that 1) the U.S. spends too much on defense, compared to other countries. 2) the U.S. has to end ‘endless wars,’ and 3) he favors diplomacy over military power. Sanders also has been highly critical of U.S. sales of weapons used in Yemen and Feb. 25 comments on [Benjamin] Netanyahu may suggest more pressure on U.S.-Israeli defense sales if he were elected.”
Callan predicts a Sanders administration would be “tougher on contractor returns on investment, progress payments, and risk and cost sharing.”
Wall Street is betting on Trump winning reelection against Sanders.
“We could see a point in 2020 either before the election, if Sanders won the nomination and if he polled well against Trump, or as a result of the election, where defense sentiment turned sharply negative,” Callan wrote. “The issues that analysts and planners would then have to navigate are 1) who Sanders nominates for DoD and who he chooses as national security advisor and 2) what changes his Administration proposes for the FY22 budget which will have been prepared by the Trump Administration.”
After a Citi investors conference in Miami last week, analyst Jon Raviv wrote that the “defense conversation is still all about growth visibility as budgets flatten out. This focus is unchanged vs. last year’s conference, although there’s now a bit more urgency with this administration’s first flattish budget with an election right on the horizon.”
The Trump administration’s fiscal 2021 defense budget request is $741 billion, in line with a spending deal reached with Congress last year and down 1.1 percent from the 2020 budget in real terms. While defense officials have said the Pentagon needs 3 to 5 percent annual growth, its 2021 budget request projects roughly 2 percent growth annually for the next five years.
Still, no one is hitting the panic button yet.
“We did not sense election worries just yet since (a) defense is generally bipartisan and (b) ‘it’s still early,’” Raviv wrote.
We’ll see what Wall Street thinks after Super Tuesday.
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