Palantir’s (PLTR) extended its losing streak on Tuesday as its rich valuation continued to gather the wrong kind of attention amid a diverging path in the U.S.-Europe military industrial complex.
Arms manufacturers like Germany’s Rheinmetall (RNMBY) have soared this year on expectations for bigger defense spending by European nations; but the very same dynamic that’s powering them – Donald Trump’s reframing of the Ukraine conflict and his desire to cut costs – seems to be weighing on U.S. stocks like Lockheed Martin (LMT), General Dynamics (GD) and L3Harris Technologies (LHX). Contrasting with losses this year for shares of LMT and NOC, Rheinmetall (DE:RHM) is up around 56% this year.
And faced with looming Pentagon cuts, PLTR, which gets about 40% of its revenues from government contracts relating to its AI-based defense and intelligence tools, has fallen by almost 30% in the last five days.
Germany Moves to Rearm
Following the elections over the weekend, it’s been reported that Germany is considering €200 billion ($210 billion) in emergency defense spending to rebuild its military. Chancellor-in-waiting Friedrich Merz is said to be in talks over how to bypass Germany’s notoriously conservative borrowing restrictions.
Furthermore, UK Prime Minister Keir Starmer announced today the UK will increase defence spending to 2.5% of GDP by 2027, up from a current 2.3%, helping to nudge BAE Systems (BAESF) shares up almost 4% on the day to take their YTD gains to over 17%.
Last month, European Council President Antonio Costa said the 23 EU members who also belong to NATO would likely agree to raise the defence spending target above the current 2% of GDP. Lithuania and Estonia, which both directly neighbour Russia, have already committed to boost defence spending to 5%.
Defense spending has risen to the top of the agenda among European nations in the wake of Donald Trump’s election in November, subsequent push for Nato countries to contribute more to their own defense and a total reset of relations with Ukraine. Earlier this month President Trump advised the UK and European allies to buy American weapons in order to strengthen NATO. But yesterday the U.S. voted with Russia at the United Nations, while Trump has threatened to withdraw support for Ukraine’s war with its larger neighbour.
Mixed Messages for Defense Stocks from the White House
Last week, defense secretary Pete Hesgeth issued a memo calling on Pentagon officials to make 8% in budget cuts each year for the next five years. Officials were supposed to submit proposals for the cuts by Monday.
Meanwhile on Friday the Defense Department said it is aiming to cut 5% to 8% of its civilian workforce, as part of cost-cutting measures driven by Elon Musk’s Depart of Government Efficiency.
However, there have been plenty of mixed messages on defense spending. For example, the memo was issued a day before Trump backed the House’s budget plan for an extra $100 billion in defense spending.
That came a week after he said that Pentagon spending could be halved at some point in the future. Meanwhile he has issued an executive order to look at the creation of an “Iron Dome of America” missile defense system, which presumably would not come cheap.
Even Hesgeth seems unsure. Earlier this month Hesgeth called for more money, saying that “the US needs to spend more than the Biden administration was willing to.”
And in his memo demanding cuts, the Washington Post reported that Hesgeth said they “must act urgently to revive the warrior ethos, rebuild our military, and reestablish deterrence.” Apparently, the cuts are designed to offset costs related to programs like border security and the Iron Dome for America missile defense system.
What Is the Best Defense Stock to Buy?
For investors interested in investing in the defense sector, we have rounded up the best stocks that analysts are bullish about using the TipRanks Stocks Comparison Tool.
