Citi Research on Wednesday cautioned clients about chasing defense stocks at the current levels, citing stretched valuations and limited upside potential despite expectations for higher military spending under President Donald Trump.
"After nearly seven years with a positive bent on defense stocks we are now turning more neutral on the group," equity analyst Jason Gursky wrote in a research note. "This shift is driven by a potential disconnect in investor expectations for industry growth & by potential pressure on historic business models. We don't think the sector underperforms indices going forward per se; it's just that it's reaching fair value," he said.
The report was released after White House officials on Monday told reporters of a budget proposal calling for a $54 billion increase in defense spending next year. In a speech to Congress on Tuesday night, Trump called for one of the largest increases in defense spending in American history.
Given expectations of what the new administration might be able to accomplish, Citi says defense stocks have already run up, and are now trading at multiples the firm considers to be "aggressive."