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Iran’s weekend attack on Israel isn’t likely to affect defense stocks unless the United States ramps up military spending, analysts at financial-services firm Wells Fargo said in a report Monday.
“While the risks of a broader conflict in the Middle East have grown, we don't see a clear path to higher U.S. defense spending,” Matthew Akers, analyst at Wells Fargo, said in the report. “We remain cautious on the group and prefer L3Harris Technologies (LHX) and RTX (NYSE:RTX).”
U.S. defense spending is currently capped as part of a budget deal approved by Congress. A $95 billion supplemental package to support U.S. allies, replenish weapons provided to Taiwan and send humanitarian aid to civilians in Ukraine and Gaza has languished for the past two months.
House Speaker Mike Johnson on Sunday said he will try to win House approval for the spending amid divided support among fellow Republic lawmakers. The supplemental spending is equivalent to about 11% of proposed defense budget for the government’s 2025 fiscal year.
“We already saw the supplemental bill as more likely than not to pass this year,” according to Wells Fargo. “After this weekend's events, we put the odds at 90%-plus.”
Israel and its partners intercepted 99% of the more than 300 missiles and drones launched by Iran.
“The bulk of air defense systems employed use RTX-built interceptors, including the U.S. Aegis system and Israeli David's Sling and Iron Dome,” according to Wells Fargo. “Conservatively hundreds of millions of dollars worth of interceptors were consumed and will need to be replenished.”
Wells Fargo's Overweight-rated stocks provide information-technology services to the federal government and defense department: L3Harris (LHX), Leidos (LDOS), General Dynamics (GD) and CACI (CACI).