BofA looks at the impact of Trump’s signature fiscal policy on defense stocks

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Investing.com - The defense industry stands to be a crucial beneficiary of the massive tax-cuts and spending bill that was signed...

Investing.com - The defense industry stands to be a crucial beneficiary of the massive tax-cuts and spending bill that was signed into law by U.S. President Donald Trump earlier this month, according to analysts at BofA Securities.

A controversial package of measures that included the extension of 2017 tax cuts and other tax reductions, the legislation -- which Trump referred to as his "One Big Beautiful Bill" -- also lifts federal expenditures on defense by a mandatory $150 billion.

The additional funding will be allocated to missile defense systems, drone development, munitions, nuclear modernization, and support for the shipbuilding industrial base, while money will also go to bolstering border security.

Meanwhile, changes to the tax code in the bill also allow companies to immediately deduct domestic research and development expenses.

Expensing of investments in depreciable assets like gear and qualified improvement property has also been returned to 100%. Under prior law, so-called bonus depreciation would have been phased out by 20% until reaching 0% in 2027.

Trump’s signature fiscal policy also expands the scope of a 30% tax break on interest expenses for businesses. The law essentially changes the definition of adjusted taxable income to earnings before interest, tax, depreciation and amortization -- known as EBITDA. Previously it referred to earnings before interest and taxes, or EBIT, meaning that the alteration should raise the amount of business interest that can be deducted.

Defense stocks and services businesses who were affected by increased tax burdens over the last few years are tipped to benefit from these revisions, the BofA analysts led by Ronald Epstein said, adding that these firms should see, on average, a 20% to 30% free cash flow boost.

Northrop Grumman (NYSE:NOC), L3Harris Technologies (NYSE:LHX), and RTX were predicted to be the largest beneficiaries, with Lockheed Martin (NYSE:LMT) and General Dynamics (NYSE:GD) seeing a more limited boost.

Leidos (NYSE:LDOS) and Parsons (NYSE:PSN) are also viewed as "well positioned" after the bill placed $12.5 billion in funding to modernize air traffic control infrastructure, the analysts said.

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Morgan Stanley: One stock to buy, one to avoid in $45B software opportunity

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Investing.com -- Morgan Stanley initiated coverage of the $45 billion supply chain software market, highlighting a sector at a critical cloud adoption inflection point and ripe for consolidation.

In a note to clients, the bank urges selectivity, initiating SPS Commerce (NASDAQ:SPSC) at Overweight, and issuing a bearish view on Manhattan Associates (NASDAQ:MANH) (Underweight).

“We favor names at FCF inflection points, have low expectations, and upward estimate revisions,” Morgan Stanley analysts wrote.

They assigned SPSC a $180 price target, offering a potential 30% upside. “Investors are underappreciating the durability of growth for this tariff beneficiary and the EBITDA margin inflection at a discounted 22X FCF,” the bank said.

On the flip side, Morgan Stanley assigned Underweight-rated MANH a $190 target, citing concerns about its premium valuation.

“Recent slowdown in cloud bookings presents downside risk to FY26 estimates, which is not priced in at a premium valuation of 39X FCF,” the analysts warned.

The firm described the sector’s fundamentals as “some of the best... across the entire software industry,” citing >8X LTV/CAC ratios and strong management teams.

Still, year-to-date underperformance, stocks have lagged the broader software sector by 15%, making stock selection critical, according to the bank.

Morgan Stanley also initiated Descartes Systems Group (NASDAQ:DSGX) at Equal-weight, pointing to “a lower pace of EBITDA growth” and limited upside.

While cloud penetration remains low at just 40%, the bank sees this changing rapidly.

“We fundamentally like this sub-sector,” stated the bank, adding that it is “rising up CIO priority lists.”

However, the bank concluded: “It is prudent to be selective given high valuations leave little room for error.”

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Own ARM stock? This Is the 1 Thing to Watch Now

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Key Points

Arm Holdings (NASDAQ: ARM) has emerged as one of the top semiconductor and artificial intelligence (AI) stocks on the market today. After going public in 2023, the stock soared as investors realized it had more exposure to AI than they initially believed. Today, Arm stock is expensive, trading at a price-to-sales ratio of 38, but it also has a robust set of competitive advantages that set it apart from any other stock in its industry.

There are two things that are unique about Arm. First, its business model is distinct from any other tech company. Rather than designing chips, the company licenses its CPU architecture to companies like Apple and Nvidia. It earns revenue when it sells those licenses, and it earns royalty revenue when the products containing those licenses are sold. That gives the company a more resilient revenue stream than most semiconductor companies, and the royalties it earns tend to last for years. It's also led to high margins.

The other unique component of Arm's business is its CPU architecture, which is known for being more power-efficient than the competing x86 alternative made by Intel and AMD. That's led to Arm gaining essentially universal adoption in the smartphone market with 99% market share, and it's also made it a popular choice for the rapidly growing data center market, where efficiency is also prized due to the extraordinary energy demand to run AI models.

Arm just finished its fiscal 2025 year, but there is one product line in particular that investors should watch as it kicks off a new fiscal year.

Arm Compute Subsystems

Arm has historically licensed its CPU architecture, but its latest iteration, Compute Subsystems (CSS), takes that strategy one step further.

Arm subsystems are pre-verified and pre-integrated configurations of its technology that help accelerate the development of Arm-based systems. Last year, the company introduced its first CSS targeted at the infrastructure space, supporting AI and data centers, and the company is seeing rapid adoption of CSS.

Growth of CSS not only strengthens its business model by giving customers a more complete model, but it also brings in more money for Arm as royalty rates for CSS are about double what they are for v9, its latest CPU design.

In the fourth quarter, it sold its first license for automotive CSS, tapping into another massive market for the company. CSS is especially valuable to the company because it accelerates time-to-market for Arm's customers, allowing them to bring a product to market faster, creating more value for them, which means Arm can collect revenue faster. The royalty rates are significantly higher as well, allowing the company to earn more money without needing growth in the overall device market.

Arm is also moving into other new territory like ASIC custom chips, showing it's expanding its addressable market in other ways.

Where Arm stands today

Arm stock fell in the fiscal fourth quarter, reported back in May, after management didn't give guidance for the next fiscal year. That was due to the more general uncertainty around tariffs, and the fact that Arm's customers have also not given guidance. First-quarter guidance called for roughly 13% growth, though its quarter-to-quarter growth rate is volatile due to the nature of licensing deals.

However, that uncertainty shouldn't be mistaken for weakness as the company's momentum in AI remains strong, especially as it moves into new product lines like CSS and ASIC.

Compute Subsystems could hold the key for the company's growth in the coming years, especially as AI drives growing demand for designs. With double the royalty rate and a faster time to market, CSS could drive the next leg of growth for the company.

Should you invest $1,000 in Arm Holdings right now?

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Jeremy Bowman has positions in Arm Holdings and Nvidia. The Motley Fool has positions in and recommends Apple and Nvidia. The Motley Fool has a disclosure policy.

Own ARM stock? This Is the 1 Thing to Watch Now was originally published by The Motley Fool

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39.1% of Warren Buffett's $291 Billion Portfolio Is Invested in 3 Artificial Intelligence (AI) Stocks

Motley Fool

Key Points

At the age of 94 and currently in his last year as CEO of Berkshire Hathaway, it would be easy to view Warren Buffett as an old-fashioned investor. But you don't become the best investor of all time by staying in the past.

While Buffett always abides by a core set of investing principles that have served him well, he's never been afraid to invest in new sectors if he sees a wonderful business trading at a fair price. When you look across Berkshire's massive $291 billion equities portfolio, most sectors are represented -- even the high-flying artificial intelligence (AI) sector. In fact, 39.1% of Berkshire's portfolio is invested in just three AI stocks.

1. Apple: 21.9% of portfolio

Buffett and Berkshire first acquired shares in the iconic consumer tech company Apple (NASDAQ: AAPL) in 2016, and at one point, Apple consumed over 40% of Berkshire's portfolio. Since then, Berkshire has decreased its position in the company, although it was still the largest position in the portfolio at the end of the first quarter of the year.

As a "Magnificent Seven" stock and one of the largest publicly traded companies, Apple has always led the way on technological innovation with products such as the original MacIntosh computer, the MacBook, the iPad, AirPods, and of course, the iPhone. So naturally, it's not surprising to see the company become a leading innovator in the AI space by incorporating the tech into its product set.

Not long ago, Apple released Apple Intelligence, its broad suite of AI tools. These tools include more efficient ways to write on Apple products, new ways to create images and other visual content, and ways to leverage AI and machine learning into Apple's conversational chatbot Siri, which also integrates ChatGPT. Apple essentially put a supercomputer in everyone's pocket with the iPhone, so it's perfectly logical to assume that the iPhone will integrate more AI tools over time. Apple also uses AI for many other tasks within the iPhone, including battery management, voice recognition, fraud prevention in Apple Pay, and Face ID.

The stock has struggled this year and is down about 13.5% in 2025 (as of July 15). All of the chaos caused by tariffs has hurt Apple because so much of its supply chain is based in China and Vietnam. Trading above 29 times forward earnings, slightly above its five-year average, I still have near-term concerns about the stock. The tariff saga is certainly not over and I think investors probably want to see Apple do more with AI. However, given the brand Apple has built and its market share, I strongly suspect Apple will be able to weather the storm, so long-term investors should be fine.

2. American Express: 16.4% of portfolio

The credit card and payments company American Express (NYSE: AXP) will likely never be viewed as a traditional AI stock. That's because American Express, at its core, is a bank, and banks must hold regulatory capital. The banking sector has also woefully underperformed the broader market since the Great Recession, and banks also face cyclical headwinds because they make loans, which can go bad during economic downturns.

However, American Express is certainly not your traditional bank and also operates a closed-loop payments system. Buffett has owned the stock for decades, and there's no doubt that the company is tapping into AI and machine learning for automation and to more efficiently run complex parts of its banking and payments businesses as well.

American Express has a 17-person Frontier Research Team that specifically focuses on how it can use AI/ML across its operations. This team looks for areas where AI can be used to help market to and approve new customers for products. They also want to use AI to help customers better manage their accounts virtually, and for customer service and payments.

One use case of the Frontier team was looking at how AI/ML could be used to improve credit decisions and fraud prevention. They leaned on data pre-processing, which involves taking raw data and using AI/ML to organize it into formats that are easier to analyze, which not only saves time for more important tasks, but helped the company better train and improve its credit models.

American Express has been an excellent stock to own for decades, so it's no surprise to see the company at the forefront of innovation. American Express has a highly coveted revenue stream driven by interest income from credit card loans made to higher-income borrowers, as well as a large payments system that brings in fee income, and that won't be easy to replicate.

3. Amazon: 0.8% of portfolio

The large e-commerce and tech conglomerate Amazon (NASDAQ: AMZN) is a much smaller position for Buffett than the two stocks mentioned above, but it might be Berkshire's most traditional AI play.

Not only can Amazon integrate AI capabilities into its massive online e-commerce business to improve logistics and better market its products, but the company said earlier this year that it will likely spend $100 billion on AI-related capital expenditures. AI is an ideal fit for Amazon Web Services, which helps companies run their business in the cloud without having to own and operate the physical infrastructure. Amazon can now tack on AI services that companies can use without having to build AI-related infrastructure.

According to CNBC, Amazon has been building and investing in data centers and other hardware needed to power AI since OpenAI launched ChatGPT in 2022. The company has also unveiled many AI tools and products, including a chatbot for shopping called Rufus, a bundle of large language models for building AI applications, and even its own semiconductor chip called Trainium.

Amazon has had its own struggles with tariffs, primarily because so many sellers and products the company sells are not located in or made in the U.S. But considering how much opportunity there is to bring businesses onto the cloud, let alone the potential for widespread commercial AI use, it's hard to see how Amazon won't be a long-term beneficiary of the AI movement.

Should you invest $1,000 in Apple right now?

Before you buy stock in Apple, consider this:

The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Apple wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

*Stock Advisor returns as of July 15, 2025

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. American Express is an advertising partner of Motley Fool Money. Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Apple, and Berkshire Hathaway. The Motley Fool has a disclosure policy.

39.1% of Warren Buffett's $291 Billion Portfolio Is Invested in 3 Artificial Intelligence (AI) Stocks was originally published by The Motley Fool

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European airport stocks: How a new cycle will pan out

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Investing.com -- European airport operators are entering a new investment cycle defined by slower structural traffic growth and sharply rising capital expenditure.

The shift marks a break from the pre-pandemic era, when air travel grew well above GDP and supported share price rallies.

That cycle ended abruptly with COVID-19, and recovery since has been uneven, creating clear winners and laggards among operators.

As per analysts at Bernstein, Aena, ADP, Flughafen (VIE:VIEV) Zurich (FHZ), and Fraport (ETR:FRAG) face sharply different outlooks.

Air traffic has rebounded quickly in leisure-heavy markets such as Spain, Italy, and Greece, but remains below 2019 levels in Germany, France, and Switzerland.

Corporate travel remains impaired, while regulatory pressure on carbon emissions is rising.

Measures such as France’s ban on short-haul flights with rail alternatives and Germany’s 75% increase in flight taxes are weighing on demand and pricing.

Amid this new backdrop, airports must address capacity limits. Average annual regulated capex across the sector is forecast to rise by 60% to €2.8 billion between 2025 and 2034, up from €1.8 billion between 2017 and 2024.

Aena and ADP will drive most of the increase, while Fraport will pause major investments.

Tariff outlooks vary. Aena and FHZ are expected to see moderate to negative growth, while ADP could secure modest increases. Fraport has the most clarity, with a four-year deal in place averaging 4% annually.

Commercial segments such as retail, food and beverage, and parking remain critical. These non-regulated businesses often deliver high margins and account for as much as two-thirds of enterprise value for Aena and FHZ.

In financial terms, Fraport is forecast to deliver the strongest improvement, with a projected free cash flow yield of 3% from 2025 to 2034.

Aena leads with a 6.6% yield. FHZ and ADP lag, at 2.1% and 6.4%, respectively. Aena leads in return metrics with an estimated 2025 ROIC of 14.3%, ahead of FHZ at 7.6%, ADP at 5.1%, and Fraport at 3.8%.

EBITDA margins are expected to decline across most operators. Aena is forecast to average 60.2% in 2024, ahead of FHZ at 47%, ADP at 33.6%, and Fraport at 28.4%. Fraport’s margin, however, is expected to improve over the next cycle.

On valuations, Aena and Fraport are rated "outperform," while ADP and FHZ are rated “market perform.”

Fraport offers more than 20% upside to Bernstein’s €84 target price. Aena’s target is €28.

ADP’s outlook is capped by high capex, political risk, and flat traffic. FHZ’s rating was downgraded due to a full valuation, costly projects, and tariff concerns.

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Sizing China’s AI chip ambitions amid rising demand

Investing.com

Investing.com -- China’s AI chip demand is projected to hit $39.5 billion in 2025, yet supply is expected to fall short at $37 billion, leaving a $2.5 billion gap, said analysts at Bernstein in a recent note.

This shortfall persists even after the U.S. approved Nvidia’s resumption of H20 GPU sales to China, which had previously been restricted under export controls.

Prior to the ban, Nvidia (NASDAQ:NVDA) was set to supply $22.9 billion worth of H20 chips. The restriction, implemented in April 2025, resulted in an estimated $16.8 billion in lost sales.

Nvidia is now expected to recover about $10.5 billion of that by year-end. An additional $2.8 billion is anticipated from the company’s new B30 chip, set for shipment in September, the brokerage said.

AMD (NASDAQ:AMD) is expected to contribute $1 billion, while Chinese vendors retain a $1.5 billion boost in sales gained during the ban.

Before restrictions, AI chip supply in China was projected to fall short by $12.6 billion. Revised forecasts suggest this gap has narrowed significantly due to resumed sales and alternative sourcing.

However, bottlenecks in foundry capacity and advanced packaging, especially CoWoS, continue to limit production.

ByteDance, Tencent, Alibaba (NYSE:BABA), and Baidu (NASDAQ:BIDU) accounted for over 80% of H20 demand in 2024 and were expected to maintain dominance in 2025.

Before the ban, combined orders from ByteDance and Tencent were projected to reach 800,000 chips.

China’s domestic vendors are poised to expand their market share. The localization ratio is expected to climb from 17% in 2023 to 55% by 2027.

Analysts said that Nvidia’s market share is projected to fall from 66% in 2024 to 54% in 2025, while Huawei is forecast to grow from 23% to 28%. The total AI accelerator market in China is expected to double from 2024 levels, reaching $36 billion in 2025.

Huawei’s Ascend 910C chip is forecast to ship 350,000 units this year. While it trails Nvidia’s H100 in performance, it is gaining traction in inference tasks.

Performance constraints persist across China’s domestic chips, particularly in processing throughput and software compatibility, but local vendors are closing the gap.

Capital spending is surging. AI-related capex in China is expected to reach $91 billion in 2025, with $38 billion allocated to domestic AI chip procurement.

Major firms are driving investment, Alibaba plans to spend ¥380 billion ($53 billion) over three years, while ByteDance is allocating ¥150 billion ($20.6 billion).

Government support includes a $138 billion state venture fund and $8.2 billion in national AI investment funding.

Despite ongoing constraints, domestic vendors are projected to grow at a 112% compound annual rate through 2027, far outpacing the 36% rate of overseas suppliers.

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