Defense stocks have struggled since the Iran war began after several years of solid gains, but Citi analysts say they are “reluctant” to buy the dip — even though they expect revenues to strengthen in the second half. The iShares U.S. Aerospace & Defense ETF (ITA), for example, has dropped about 10% since the start of March, when the Middle East conflict began following the joint U.S.-Israeli strike on the Islamic Republic. The S & P 500 added 8.6% over the same period. In a note published on Thursday, Citi reiterated earlier analysis of “unusual pressure” linked to a “combination of weak earnings prints/pre-announcements and changing top-down themes, namely relating to software/AI.” The sector is viewed as increasingly vulnerable to the same AI-disruption fears weighing on other industries, such as software, according to Citi. “Despite the best efforts of the management teams to argue otherwise, the anti-defense-services AI narrative is only getting louder,” the analysts wrote. Citi’s analysis found that any defense company that referenced the topics of “AI”, “software”, and other related terms on recent conference calls has traded highly negatively correlated to an index of AI-themed stocks. The team added that they were “reluctant” to buy the dip in this space, but said that if the overhang persists it could accelerate buying opportunities in the space. They wrote: “Earlier in the year, we noted that defense services had come under unusual pressure for a variety of reasons.” “We’ve described the defense services setup as a largely 2H-weighted rebound event, which is why we’ve been reluctant to argue for dip buying, but as this overhang persists, it could accelerate buying opportunities across the space.”
