Defense & Aerospace Report Podcast [Apr 05, ’25 Business Report]
Apr 5, 2025
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Join industry experts Ron Epstein, a market analyst from Bank of America Securities, Sash Tusa, an independent equity researcher, and Richard Aboulafia from AeroDynamic Advisory, as they dissect the far-reaching impacts of sweeping tariffs. They discuss how the aerospace and defense sectors are grappling with stock declines, inflation fears, and the threat of recession. The trio also addresses the unpredictable global trade landscape and the implications of tariffs on market dynamics and supplier relationships, all while keeping a close eye on the looming Paris Air Show.
The recent sweeping tariffs caused a dramatic 10% decline in the S&P 500, impacting capital markets significantly since historic global conflicts.
Aerospace and defense suppliers like Howmet are facing severe supply chain disruptions and may struggle to fulfill existing contracts due to increased costs.
The tariffs, aimed at protecting the economy, could instead burden consumers with an average price increase of $2,100 per family.
Deep dives
Impact of Tariffs on Capital Markets
The recent implementation of sweeping tariffs has led to a significant decline in capital markets, with the S&P 500 dropping by nearly 10% within just two days. This is noted as one of the most substantial abrupt tax hikes since major global conflicts. Treasury Secretary Scott Besant warned that retaliatory actions from other nations could lead to higher tariffs, yet countries proceeded to respond regardless. The ongoing turmoil results in projections from J.P. Morgan estimating a 60% chance of a recession, raising concerns about long-term economic stability.
Consequences for Aerospace and Defense Industries
Aerospace and defense suppliers are facing immediate challenges as new tariffs have disrupted their supply chains and production capabilities. Howmet has notably declared the tariffs a force majeure event, indicating their potential inability to deliver products under existing contracts due to increased costs. This move highlights a broader concern within the industry, as other companies may follow suit, signaling a potential shift in contract management and market operations. The situation is compounded by China's cut in rare earth shipments to the U.S., further escalating supply chain vulnerabilities.
Market Reactions and Investor Sentiment
Investor sentiment has swung dramatically, reflecting anxiety over looming economic decline and the uncertainty surrounding future earnings forecasts from corporations. The volatility in the market, evidenced by the sharp rise in the VIX index, echoes experiences from past economic crises, such as the 2008 financial downturn. Aerospace stocks have experienced notable losses, with companies like Boeing and General Dynamics significantly affected. This uncertainty prevents most firms from confidently giving earnings guidance, leading to heightened caution in investment strategies.
Implications of Tariff Structures on Consumers
Tariffs imposed by the U.S. government effectively serve as a tax burden on consumers, as importers are responsible for paying these tariffs, which are then passed on to the end-users. This structural misconception leads to a regressive impact on households, with projections indicating an average increase of $2,100 per family. The implications extend to everyday products and are expected to raise prices across various sectors, including consumer goods and industrial materials. As a result, the effects of these tariffs are anticipated to ripple through the economy, influencing purchasing behaviors and market dynamics.
Long-Term Outlook for International Trade and Defense
The current tariff measures could lead to a prolonged period of strained international relations and trade dynamics, with nations like China and European allies viewing U.S. actions with skepticism. As defense companies consider relocating manufacturing to the U.S. to circumvent tariffs, the practicality of such moves raises concerns given the substantial time and investment required for such transitions. The tension between maintaining competitive pricing and supporting domestic production complicates the landscape for defense procurement. As businesses adapt, the industry may see a shift towards securing contracts and pricing strategies that align with this new reality, potentially reshaping future market interactions.
On this week’s Defense & Aerospace Report Business Roundtable, sponsored by Bell, Dr. “Rocket” Ron Epstein of Bank of America Securities, Sash Tusa of the independent equity research firm Agency Partners, and Richard Aboulafia of the AeroDynamic advisory consultancy join host Vago Muradian to discuss global market reaction to President Trump’s sweeping tariffs that are being compared by economists as the largest abrupt tax hikes since the Vietnam war if not World War 2; how aerospace and defense stocks fared as the Standard & Poor’s 500 lost 10 percent of its value in two days driving markets to their worst day since 2020; despite a warning by Treasury Secretary Scott Bessent that nations not retaliate otherwise they would face higher tariffs, nations retaliated anyway including China that blocked rare earth exports to the United States; Federal Reserve Chairman Jerome Powell dryly noted that tariffs risk higher inflation and lower economic growth; despite the loss of nearly $6 trillion in market value and damage to America’s reputation as a financial safe harbor, administration officials continued to make the case that the American economy was in tough shape and in dire need of shock therapy even though US stock values hit highs in February; JPMorgan estimated a 60 percent chance of recession this year with some economists worrying about a depression; as aerospace and defense suppliers scramble to cope with Washington’s new tax, Howmet was the first major aerospace firm to declare the tariffs a force majeure event and warn customers it might not be able to deliver as a consequence; and whether defense contracts would be spared from tariffs and how programs cots could be impacted.
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