Higher NATO Defense Spending May Not Help U.S. Contractors

President Donald Trump emerged from the NATO summit in Brussels touting a renewed commitment from members to increase their defense spending, but U.S. defense firms might want to hold off on the champagne — at least for now.

Trump claimed that European leaders had pledged to accelerate their individual efforts to reach the goal of spending 2 percent of their country’s gross domestic product on defense, possibly hitting that target sometime next year rather than by 2024 as originally planned.

But even if that happens — NATO Secretary-General Jens Stoltenberg signaled agreement with Trump in principle on higher defense spending but did not commit to a specific time frame — analysts said that would not lead directly to a windfall for American defense contractors.

“There’s this double-edged sword to this U.S. desire that Europe” take charge of its own defense, said Byron Callan, a defense analyst for Capital Alpha Partners. The more Europe steps up its contributions, the more likely it is that it will seek to spend those dollars at home to benefit Europe’s defense industrial base.

As Callan wrote in a note to investors, European defense stocks outperformed U.S. defense stocks last week, an indication that investors think it is European weapons makers who will reap the benefit of any spending increases that follow the summit.

“The market perceives this as the first choices not being the American primes,” Callan said, referring to the biggest U.S. defense contractors. Defense dollars are seen as a source of good jobs in Europe as they are in the United States, he said, so why would Europe choose to support jobs in America over jobs in Germany, Italy or France?

“To me, [a boost in European spending] logically would point to more support for European industry versus U.S. industry,” Callan said.

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