Budgetary belt tightening in the US – European companies count profits

In recent months, the drastic reduction in U.S. government spending has hit companies that rely on government contracts hard, especially in the defense, consulting and health care sectors. European companies from the same sectors are recording dynamic growth investor interest. The market is clearly starting to differentiate the situation of companies on both sides of the Atlantic, rewarding those that adapt best to the new reality. Limited administration, in order to operate effectively, will greatly need solutions based on artificial intelligence, which can help companies in this industry.

Military spending is falling

One area where spending cuts have already begun to take their toll is defense. DOGE's efforts to curb Pentagon spending have already had a ripple effect on defense contractors. Leidos, a company that provides solutions for defense, government, and healthcare, lost a $232 million contract. The company's shares fell 4% as a result, and the declines could be even greater, as the company derives as much as 87% of its revenue from U.S. government contracts. Military drone manufacturer Kratos warned in February 2024 in documents for SEC about the risk of losing some government contracts. Last year, the company received $762 million in orders from public institutions. Meanwhile, Palantir, initially seen as a potential victim of the cuts, is now considered by many analysts as a possible beneficiary. The government administration, reduced due to the cuts, may particularly need solutions based on artificial intelligence, in which the company specializes. Palantir shares It recently traded in a range between $125 and $76, and recently reached $96.

The growing pressure from the Trump administration to make deep cuts in consulting and IT contracts has led to a decline in the stock prices of consulting giants Accenture and Gartner by 6,35 percent and 7,31 percent, respectively. The CEO of Accenture openly stated DOGE as a “potential drag on growth” during an investor call, sending the stock further lower. Meanwhile, Defense Secretary Pete Hegseth announced on the X platform his intention to eliminate “unnecessary spending,” naming Gartner among the companies whose contracts would be cut.

Europe benefits from all this

But the shift in U.S. policy is creating new opportunities for competition across the Atlantic—in Europe. While giants like Germany’s Rheinmetall and Hensoldt and Italy’s Leonardo have seen impressive share price gains this year, smaller European defense companies are seeing even more dramatic changes. French satellite company Eutelsat rose a staggering 500% in just a few days amid speculation it could replace Starlink in Ukraine. French drone maker Drone Volt also benefited from growing security concerns, rising more than 200% in early March. The companies have generated a lot of interest from investors, with open interest in Eutelsat and Drone Volt up 25-fold and 18-fold, respectively, on eToro in the first half of March.

Healthcare in trouble

The industry that could feel the effects of the Trump administration’s policies the most is healthcare. This is important because for many investors it is a defensive industry that can be invested in regardless of the economic cycle. DOGE’s plan to reduce federal spending by $500 billion likely means cuts to Medicaid programs and Affordable Care Act (ACA) subsidies. Hospitals and clinics that rely on government reimbursements, such as HCA Healthcare, Community Health Systems and other publicly traded companies, can expect declining margins and a period of revenue instability. The new reality could force them to implement radical cost-cutting programs – a broader focus on telemedicine, online patient support and AI implementation. All of this creates opportunities for companies operating in these areas. DOGE’s impact could also affect the FDA (Food and Drug Administration), which is responsible for approving new drugs. Delays in this area due to staff reductions could threaten profits, especially since patents on key products of many large pharmaceutical companies expire in the next two years.

Summary

All of this sends a clear signal to investors: a company’s risk sensitivity no longer depends only on the size of the contract, but on the structure of its entire business model. Investors should understand exactly where the revenues of the companies they invest in come from, so that they can mitigate risks or take advantage of new opportunities. The changes in the way the US government operates show how important the fundamentals of companies are, and that a simple “buy the bottom” strategy may not work in affected sectors. On the other hand, there is no doubt that the reduced administration, in order to maintain and perhaps improve its efficiency, will increasingly use artificial intelligence. And this is definitely an opportunity for all companies in this industry, which have recently been struggling with falling stock prices.

About the author

Pawel Majtkowski - analyst eToro on the Polish market, which shares its weekly commentary on the latest stock market information. Paweł is a recognized expert on financial markets with extensive experience as an analyst in financial institutions. He is also one of the most cited experts in the field of economy and financial markets in Poland. He graduated from law studies at the University of Warsaw. He is also the author of many publications in the field of investing, personal finance and economy.