Must Read Research

Defense wins championships — and lately, its winning headlines, fund flows, and investor mindshare. This week, we explore what’s fueling renewed interest in Defense, break down the drivers behind inflecting grid and power infrastructure capex, apply a proprietary lens to potential bank M&A targets, and reassess the fundamentals behind Emerging Market outperformance.

 

Defense stocks are surging.

Analyst Benjamin Heelan’s European Aerospace & Defense coverage is up ~ 120% YTD (year-to-date), fueled by performance and flows. Defense ETFs (exchange traded funds) are leading all thematic strategies in inflows. An additional $70 billion in allocation could materialize if mandates expand and benchmark weights are increased within broad Socially Responsible Investing (SRI) funds, according to Haim Israel and the Thematic Investing team. Global military spending hit $2.7 trillion in 2024, up 9.4% YoY (year-over-year) – the sharpest jump since the Cold War. If NATO (North Atlantic Treaty Organization) nations move to a 3.5% GDP (Gross Domestic Product) defense target, that could mean an extra $370 billion in spending in the next 7 years. Meanwhile, the defense tech market is projected to swell to $1.2 trillion, spanning everything from drones and AI to radar and electronic warfare. As reshoring accelerates, the investment opportunity broadens, especially in semis, software, and sensors.

 

Multis Analyst Andrew Obin projects a 2.5% CAGR (compound annual growth rate) in U.S. electrical load growth over the next decade and slightly more through 2030.

While data centers contribute about 50bps (basis points) to this growth, building electrification, including heat pumps and water heaters, contributes twice as much. Industrial demand and EV (electric vehicle) adoption are also important factors. But power demand isn’t the only driver of grid equipment. Existing infrastructure is old, with 31% of transmission and 46% of distribution near or beyond its useful life. The shift towards smaller, intermittent energy sources, like solar, requires more grid connections as we move away from larger traditional power plants.

 

Bank M&A (merger & acquisition) deal values are down ~20% this year, but activity may pick up in the second half as recent regulatory changes help accelerate closings.

To help investors get ahead, U.S. Bank Analyst Brandon Berman and the SMID Cap Banks team apply a proprietary quantitative methodology and M&A heatmap to identify which banks are best positioned as acquisition targets. From a universe of 93 banks, they highlight 46 attractive candidates, with 28 capable of achieving tangible book value (TBV) earnback in under 3.5 years – a key threshold for accretive deals. While the target bank stock does tend to outperform shares of the buyer (by 14% on avg), one common factor in deals where the buyer’s stock outperformed the target’s 3 months post-announcement was a shorter TBV earnback (~2.1 years vs. the typical ~3 years). Investors looking to adjust potential deal dynamics can tweak assumptions to fine-tune the output.

 

Positioning in Emerging Markets (EM) remains surprisingly light despite strong returns this year and investor skepticism around the U.S. dollar.

Head of Global Emerging Markets Fixed Income Strategy David Hauner has maintained a bullish stance on EM since inauguration, and he is not alone in his optimism. Chief Investment Strategist Michael Hartnett points out that EM stocks are trading at 50-year low vs. the U.S., making EM an “easy” allocation decision. EM’s appeal is enhanced by strong commodity exposure, coinciding with rising demand for power and metals from AI. Historically, EM performs well when the dollar index (DXY) falls, rallying over 2% even amid rising 30 year Treasury yields. In case of a moderate global downturn, David expects EM fixed income to perform well and equities to outperform the U.S. as strong yields and a weak dollar shield the assets. The fourth biggest weekly inflow into EM debt on record suggests investors are beginning to come around to this view.