Aerospace & Defense exchange-traded funds (ETFs) like iShares U.S. Aerospace & Defense ETF (ITA Quick QuoteITA - Free Report) and Invesco Aerospace & Defense ETF (PPA Quick QuotePPA - Free Report) have hit 52-week highs lately. ITA and PPA have gained 18% and 24%, respectively, this year.  The sector holds strength and has the potential to soar higher in the coming days.

Below, we highlight a few factors that are acting as tailwinds for the Aerospace & Defense sector.

Continued Geopolitical Tension & Increase in Defense Budget

The ongoing war in the Middle East and East Europe is causing geopolitical tensions. Meanwhile, China’s defense budget for 2024 grew 7.2%, marking the ninth consecutive year of increase. The growth marked the fastest clip since 2019. India is also planning to boost defense spending with billions to be invested for new weapons.

The United States shells out more on national defense than China, India, Russia, the United Kingdom, Saudi Arabia, Germany, France, Japan and South Korea. Combined. U.S. defense spending makes up more than 10% of all federal spending and nearly half of discretionary spending.

Rising M&A Activity in Aerospace

Per HigherGov, there was solid acquisition activity in 2022 despite economic headwinds and rising rates. In 2023, deal volumes increased in aerospace and defense. Continued geopolitical threats, robust company cashflows, and continued investment in critical technologies will likely boost the business of the sector in the coming days as well.

Cheaper Valuation

The sector’s price-to-book and price-to-sales ratios are 2.40X and 1.88X, respectively. Both stand cheaper against the S&P 500’s data of 3.45X and 2.99X, respectively. The sector’s projected EPS growth is 11.91% versus the S&P 500’s EPS growth of 6.90%.