That performance belies more than a year’s worth of predictions about the dire consequences of the budget cuts known as sequestration. Former defense secretary Leon E. Panetta said the reductions would render the United States a “paper tiger.” Marion Blakey, head of the Arlington-based Aerospace Industries Association, the biggest defense industry advocacy group, estimated that more than 2 million jobs would disappear in 2013.
Investors may have concluded Pentagon proponents “overstated their case,” said Christopher Preble, vice president of defense and foreign-policy studies at Washington-based Cato Institute, which advocates for limited government. “The defense industry is still doing quite well relative to where they were a decade ago.”
Under the stopgap measure signed by President Obama last month, the Pentagon will lose $41 billion in program funding because of the automatic cuts in the fiscal year that ends Sept. 30. Defense programs would lose about $500 billion over the next nine years if the automatic cuts remain in place.
Investors snapping up defense shares may be too dismissive about that long-term budget pressure, said Brian Ruttenbur, an analyst with CRT Capital Group. Big weapons programs will inevitably be cut over that decade of retrenchment, he said.
“There’s going to be a revision downward across the board, and no one’s even talking about that,” Ruttenbur, who is based in Stamford, Conn., said in a phone interview. “People are pricing in that the Republicans are going to take dramatic tax increases in order to save defense, and I just don’t know if that’s going to be the case.”
Ruttenbur has sell ratings on General Dynamics and Northrop Grumman. He rates Lockheed fairly valued.
The defense rally has taken place even though none of the top weapons-makers considered the automatic cuts into their earnings forecast for this year. The top five defense firms, including Boeing, report first-quarter results this week.
The index of top defense firms includes Huntington Ingalls Industries, the Navy’s sole builder of aircraft carriers, which has advanced 4.6 percent since March 1. The company, which operates a shipyard in Newport News, Va., received a $2.6 billion contract for an upgrade of the USS Abraham Lincoln aircraft carrier last month.
Beci Brenton, a spokeswoman for Huntington Ingalls, said in an e-mail that “most of our work for several years is already under contract,” so near-term effects of sequestration on the company “would be minimal.”