Defence stocks drop despite US-Iran war

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0:17Good morning from the Financial Times. Today is Thursday, April 30th, and this is your FT News Briefing. Investors don't love Meta's plans for AI, and the special relationship between the US and the UK held up this week. Plus, shouldn't war be good for defense stocks? The adage goes, you buy the tension and you sell the war. I'm Mark Filippino, and here's the news you need to start your day.

0:53Meta reported quarterly earnings yesterday, and things looked pretty good on the surface. Revenues jumped 33 % in the first quarter year on year. That beat Wall Street expectations. And what's more, Meta expects revenues to rise this quarter. But the tech giant lost the crowd when it started talking about plans for artificial intelligence. Meta said it's going to expand its AI spending spree this quarter. The company raised its expected capital expenditure for this year to be as much as$145 billion. That ceiling is$10 billion higher from what Meta shared last quarter. Investors weren't too thrilled with this, meant a share price dropped in after-hours trading.

1:36Jay Powell gave his final press conference as chair of the Federal Reserve yesterday, but he's probably not leaving the U.S. Central Bank anytime soon. I welcomed the announcement last Friday by the U.S. Attorney for the District of Columbia that she had closed the criminal investigation. He's referring there to U.S. prosecutors dropping a criminal probe against him. It was related to cost overruns in a Fed building project. But over the weekend, U.S. Attorney Jeanine Pirro said she would not hesitate to restart the investigation. I've said that I will not leave the board until this investigation is well and truly over with transparency and finality.

2:12And I stand by that. After my term as chair ends on May 15, I will continue to serve as a governor for a period of time to be determined. In the meantime, Powell's successor, Kevin Warsh, cleared yet another hurdle yesterday on the road to taking up the mantle at the Fed. The Senate Banking Committee voted 13-11 to advance his candidacy to a full vote on the Senate floor. Powell's remarks came after the Fed opted to keep interest rates on hold for the third straight meeting. The committee cited higher inflation, which is due in part to the ongoing effect of U.S. tariffs and rising energy prices from the war in Iran.

2:47In sort of the textbook, you would look through an oil shock because they tend to be short-lived and they tend to revert. But looking through energy really is not in front of us right now. It hasn't even peaked yet. And I think we'd want to see the backside of that and progress on tariffs before we even thought about reducing rates. Brent crude jumped yesterday to just above$120 a barrel, its highest level since 2022. That came after U.S. President Donald Trump said he did not want to end the U.S. blockade of the Strait of Hormuz.

3:21Things between the U.S. and the U.K.? They've been better. King Charles visited Washington this week. He addressed Congress and met with U.S. President Donald Trump. And despite the tensions, the two heads of state tried to project their relationship isn't a good place. The FT's Whitehall editor, Lucy Fisher, joins me now to discuss the trip. Hi, Lucy. Hi, Mark. So there was a lot of tension between the two countries going into this visit. Get us up to speed. What was going on? Well, look, there's been a lot of antipathy between Donald Trump and Keir Starmer. And the latest raft of that has stemmed largely from what the US president sees as the UK's insufficient support for its war with Israel against Iran, the UK not allowing the US to use British bases to launch the initial strikes against the Tehran regime.

4:12And since then, we've heard Trump lashing out at the UK, suggesting that he might withdraw US support for British sovereignty in the Falkland Islands. Trump has been attacking Starmer very personally, saying he's no Churchill. And those attacks have scaled up in recent weeks. And if that wasn't enough, some leaked audio that the FT got a hold of showed that things were even more tense. Well, that's right. We got hold of a tape of remarks from earlier this year from Christian Turner, the new UK ambassador to the US. Special relationship is a phrase I try not to utter. I think there is probably one country that has a special relationship with the United States, and that's probably Israel.

5:00He also criticised the US for what he perceives as a lack of accountability for the associates of Jeffrey Epstein in the whole scandal around the convicted sex offenders' crimes, that really set the sort of pretty awkward backdrop for King Charles to be addressing Congress with this historic speech. Yeah, so how did both heads of state act during the Washington visit, and how did that speech that the king gave go? Well, it was pretty drama-free, which is rare when it comes to foreign dignitaries flying into Washington to meet with Trump. I think there is largely a sense that Trump respected the sort of impartiality of King Charles on the most part.

5:45He did say that the king agreed with him that Iran shouldn't have a bomb, a nuclear bomb. That is against the traditional royal protocol. But in the scheme of what Trump could have said from their private conversation, it's fairly small beer. And I think certainly from the UK perspective, there's a sense that Charles did very well in his speech to Congress, in which he went further than the usual bland fluff that we sometimes expect from our royals and landed some quite sort of political points on the importance of the special relationship between the UK and the US, on the importance of NATO. And he landed it all with sort of real finesse and charm to avoid sort of stoking any negative reaction from Trump.

6:29So I think he's felt to have done well in his performance. Why is it so important that these two sides project unity, even if there are all these underlying tensions that we've discussed? Well, look, there's a huge economic and trade relationship. There's a historic, you know, cultural relationship between the two nations. And it's particularly important from the UK end because Britain's defense and security so heavily relies on U.S. intelligence, U.S. logistics. And if Washington were to withdraw, it would take the U.K. and Europe billions of pounds and many years to rebuild that kind of capability.

7:13So that is one reason that the U.K. is very keen to keep hugging the U.S. close. Lucy Fisher is the FT's Whitehall editor. She also hosts the Political Fix podcast. We'll have a link to that in the show notes. Thanks, Lucy. Thanks, Mark.

7:31The Trump administration really wants to spend more money on the military. It takes money to kill bad guys. So we're going back to Congress and our folks there to ensure that we're properly funded. That's Defense Secretary Pete Hegseth speaking in mid-March. He said the Pentagon wants hundreds of billions of dollars more to fund the U.S. war on Iran. With all that spending, it seems fair to think investors would want to buy defense stocks. But since the U.S. and Israel started bombing Iran at the end of February, investors are actually selling. Shares in U.S. defense giants Northrop Grumman, RTX's Raytheon, and Lockheed Martin are all down double digits in that time.

8:08DFT's Christian Davies covers U.S. industries, including the defense sector. Hey, Christian. Hello. So just how bad has this stock sell-off been? First look, it seems very counterintuitive that U.S. defense stocks should have fallen in the wake of such a high-profile conflict. But yes, overall, they're down quite substantially. We've seen similar movements in Europe. And so this is really kind of a global sell-off defense stocks, despite this war going on in the Middle East at the moment. And similar to America, European companies are spending a lot too. So I'm wondering why investors are selling war at a time that they were expected to be buying.

8:46Yes. Well, this is often a misconception that investors tend to sell defense stocks at time of peace and buy them at times of war. What they really do is buy at times of tension. So if we expand our time horizon out a bit, the defense companies like Lockheed Martin, Northrop Grumman, RTX, and so on, they were up around 50 % in the year leading up to the Iran conflict because of all the different global tensions. And as a product of those global tensions, we're seeing governments committing to higher defense budgets. So it's really not war, but tension and the higher defense budgets that investors tend to use as moments to buy defense stocks.

9:28And then when the actual war breaks out, this is often when investors sell. And in general, the reason for that is that once a conflict actually starts, investors often turn their attention to other sectors, the so-called safe haven assets, energy and utilities. So this is a long-standing theme. War is not necessarily the time to buy. It's a time to sell. It's so interesting. Christian, we've seen some of these companies that we're talking about report earnings over the past couple of weeks, and they're doing well. So I'm curious if the numbers are good in the earnings reports, why investors are ignoring those and still selling off?

10:06The reason is that investors are not learning anything from these reports. They didn't already know. They knew that defense spending is going up. They know that demand for defense products is very high. The real question for these companies is not are there willing buyers for their products? It's can they produce enough of them at a rate quickly enough? So, for example, this year's U.S. defense budget only gave money to fund about 58 Tomahawk missiles. It's estimated that the U.S. used around 1 ,000 in the first six weeks or so of the conflict. So we know that demand is there. The real question is whether the U.S.

10:50defense industrial base is capable at the moment of producing it at the rate that the government wants. There is, of course, a very big midterm election happening in the U.S. in a couple of months. So Christian, how might the results of that midterm election impact the defense industry and investor sentiment? So where we are at the moment is the Trump administration is proposing a huge rise in defense spending, up from around a trillion a year at the moment to 1.5 trillion. This is not only a very, very large proposed increase and therefore relatively contentious. It's coupled with unhappiness surrounding this specific conflict, the Iran conflict, over the amount of transparency that the administration has given.

11:31And so Democrats who would be needed to support this are not really in a mind to do it. And interestingly, investors seem to be tracking this very closely. Some analysts have shown that the higher the chances that the Republicans maintain control of the Senate, the more confidence there is among defense investors in the sector. Christian Davies is the FT's U.S. industry correspondent. Thanks so much, Christian. Thank you. You can read more on all these stories for free when you click the links in our show notes. This has been your daily FT News Briefing. Check back tomorrow for the latest business news.

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