By Sam Boughedda
Goldman Sachs downgraded aerospace and defense stocks Lockheed Martin (NYSE:LMT) and Northrop Grumman (NYSE:NOC) to Sell in a note Friday, also cutting Raytheon Technologies (NYSE:RTX) to Neutral.
Goldman analysts said defense stocks now price in the potential for a new global geopolitical superpower struggle, but they do not price in the potential for a renewed focus on US government cumulative debt.
"The former may occur, but the latter may happen first; while defense budgets, company earnings, and valuations are all near all-time highs, creating more downside than upside risk, and leaving stock prices vulnerable to a medium-term de-rating," they wrote.
On the DoD budget, the analysts said it moves in decade-long cycles, and over time, DoD investment spending is up 70% in the last 8 years cumulatively.
"It's at an all time high in nominal absolute dollars and near peak levels in real dollars," said the analysts. "Mathematically, maintaining a high growth rate is hard, declining slightly is easy. Fundamentally, there are geopolitical upward pressures, but US fiscal policy could increasingly become a downward pressure."