At a high level, following significant support for Ukraine last year, the FY24 budget focuses heavily on the military’s posture in the Pacific. It stresses integrated deterrence, primarily via the nuclear triad (air, land, and sea), as well as both offensive and defensive missile capabilities. The president’s proposal kicks off the annual process of formulating a National Defense Authorization Act (NDAA), which typically goes through committee markup in spring, Congressional consideration in summer, House and Senate discrepancy resolution in the fall, and passage near the end of the calendar year.
Digging into the proposal, USD 38bn is earmarked for nuclear modernization, including USD 5.3bn for the new B-21 bomber (which was unveiled to the public last December), USD 6.2bn for the Columbia-Class nuclear submarine, and USD 4.3bn for the Sentinel (a replacement for 50-plus-year-old Minuteman III intercontinental ballistic missiles). The F-35 fighter jet is a relative winner as well, with requested procurement of 83 aircraft, up from 61 in the FY23 proposal and 77 in the NDAA. Missile defense is a key priority, with USD 29.8bn allocated to missile detection (including from space) and interception, but advanced offensive power is considered as well via a request for 24 hypersonic missiles. Finally, space-related capabilities remain one of the fastest-growing components of the budget, with proposed Space Force funding up 23% from the prior-year request.
Military procurement has been hampered by severe post-pandemic supply chain constraints across the weapons manufacturing industry, and while most issues are gradually resolving, some sticking points remain (such as rocket motors). This vulnerability often stems from contractors’ limited visibility to funding beyond the current fiscal year and can create meaningful risk to military readiness. In one example, the US sent Stinger anti-aircraft missiles to Ukraine from inventory, but the supply base for the product has been largely dismantled, making replenishment very challenging. We sensed that many in Washington were well aware of this obstacle, especially given warnings from the defense industry, and the FY24 proposal addresses this by leveraging multiyear procurement contracts for several key missile programs—a positive at the margin for revenue predictability and manufacturing efficiency.
While the proposed 3.2% nominal budget growth is somewhat uninspiring in the current inflation regime, we note that this is compared to relatively robust 10% growth in the prior period and Congress eventually added USD 45bn to the president’s FY23 request. However, at this early stage, the path for the defense budget remains highly uncertain going into what’s likely to be an acrimonious debate on the debt ceiling. We expect both vocal pushback from deficit hawks in Congress and arguments that the proposal falls well short of military needs, spurring headline-related volatility for industry shares. While we believe deep cuts to military spending are unlikely, we may end up with a continuing resolution that caps spending at FY23 levels or a deal that adds additional funding to the FY24 proposal, in keeping with recent history. In the interim, we think major defense contractors’ financial results should be supported by outlays associated with previous authorizations.
Main contributor: Nathaniel Gabriel, CFA, CIO Equity Strategist, Commodities & Industrial
Content is a product of the Chief Investment Office (CIO).
Original report - FY24 defense budget proposal focuses on Pacific region, nuclear deterrence , 13 March, 2023.
