With 140-character broadsides aimed at Lockheed Martin Corp.’s F-35 fighter and Boeing Co.’s Air Force One makeover, the president-elect has introduced new volatility to the normally staid sector. While drugmakers and Ford Motor Co. have also felt his wrath, the outburst against the world’s largest defense company and “out of control” costs for its marquee program underscored the new risk looming in a bull market for weapons-makers.

“The president-elect seems ready to attack any industry that displeases him,” said Loren Thompson, an analyst with the Lexington Institute. “Military contractors who think they can count on a program plan have to wonder what all this impulsive behavior by the president-elect portends for the future.”

Military budgets from Europe to Southeast Asia are rising as nations bolster their defenses to counter the growing influence of Russia and China. While U.S. defense spending is poised to grow under Trump, margins for contractors are hovering near 60-year highs, leaving them susceptible to “simplistic criticisms on the overall levels of cost,” Carter Copeland, an analyst at Barclays Plc, wrote in a note to clients Tuesday.

Eoin Treacy's view

We do not know much about what kind of President Trump is likely to be but we do know he is a tough negotiator who ran on the promise to cut out wasteful spending. With margins at defence contractors so high, military spending might increase but they are likely to be asked to deliver more for less on a per item basis. Of course that is a potential US position but is unlikely to represent a change from the build-up of military materiel in response to an increasingly tense geopolitical atmosphere. 

Lockheed Martin and other contractor’s aeronautics operations have benefitted enormously from the use of drones by the USA. Their shares have been rallying for more than five years already so it would hard to justify the view they are cheap. Volatility creeping into an otherwise orderly uptrend is seldom suggestive of a continuation pattern and the progression of higher reaction lows will need to hold if medium-term scope for higher to lateral ranging is to be given the benefit of the doubt.