3 sectors likely to be hit by US debt cuts

There is no doubt that the United States’ debt and deficit have reached dangerous levels. As a result, unless some very strange black swan event occurs, Washington will have no choice but to take significant steps to address the problem and put several sectors at risk over the next few years. If you doubt my claims, just look at some of the grim statistics.

According to CBSannual federal interest payments will reach $870 billion this year, up 32% from the previous year and exceeding the enormous amount America spends on its military. Moreover, our debt-to-GDP ratio is approximately 123%. This puts us above most other advanced economies.

Most ominously, according to the Congressional Budget Office, Washington will continue to spend up to $20 trillion in cumulative deficits between 2025 and 2034. That would put us on track for a 200% GDP-to-debt ratio that many economists say is unsustainable. So while the government is poised to take action to address this massive problem, these three sectors remain vulnerable to major cuts.

Drug producers

The only real measures to reduce inflation included in the Inflation Reduction Act hurt pharmaceutical companies. Specifically, the legislation forced these companies to “pay Medicare rebates when prices for certain drugs rise faster than the rate of inflation.” Additionally, the bill authorized the government to pay less than prevailing prices for a small number of treatments starting in 2026. This year, the Secretary of Health and Human Services will be able to pay less for 15 drugs. The Secretary will be able to add 15 more drugs to the list in both 2027 and 2028. Affected therapies must be selected from the list of therapies that cost the most to Medicare.

If Democrats keep the White House, there is a good chance that the number of drugs targeted by such actions will increase significantly. Such a move could significantly lower the share prices of the largest, most successful drugmakers such as Pfizer (NYSE:PFE), Eli Lilly (NYSE:LLY), I Merck (NYSE:MRK).

Defense companies

Defense companies are likely to suffer no matter who is president, so they are certainly one of the sectors at risk from Washington’s looming cost-cutting measures. President Donald Trump has promised that Europe will pay for the war in Ukraine, and has at times hinted that he wants to end the conflict altogether. Ukraine is using American money to buy American weapons. To the extent that it relies more on Europe to finance the war, it is likely to buy fewer American weapons. That would obviously be bad for major U.S. defense contractors, including LockheedMartin (NYSE:LMT), Northrop Grumman (NYSE:NIGHT), I Overall dynamics (NYSE:GD).

Historically, Democrats have tried to save the government money by cutting defense spending. So if President Joe Biden or another Democrat is in the White House in 2025 and 2026, we’re likely to see cuts to programs that don’t affect Ukraine. There’s also plenty of room to cut defense spending.

Indeed, not only does America spend significantly more on its military than any other nation, it spends more on it than the next nine countries combined. And American arms producers are extremely profitable, which suggests that Washington could force them to significantly lower prices without causing them to stop selling their products to the Pentagon. For example, Lockheed’s operating income was over $9 billion last year, while General Dynamics generated $3.7 billion in OI.

Senior Residential Developers

Many, if not most, Republicans have made no secret of their desire to cut Social Security spending. Most notably, former South Carolina governor and presidential candidate Nikki Haley said last year that the age is “way too low.” And former House Speaker Paul Ryan, to whom many Republicans turn for deficit-cutting ideas, has proposed deep cuts to Social Security.

While Trump has historically said he opposes cuts to entitlements, he indicated earlier this year that he fully supports the GOP position on the issue. “There’s a lot that can be done on the entitlement issue, on the cuts issue,” the former president said CNBC in March.

If Republicans follow Haley’s suggestion and significantly raise the Social Security age, senior housing developers could face significant losses. Ultimately, such a move would significantly reduce the incomes of consumers who move into senior housing by lowering the amount of rent or mortgage payments they can pass on.

Among the main owners of apartments for seniors are: Brookdale Senior Living (NYSE:BKD), Sonida Senior Living (NYSE:SNDA), and Ventilation (NYSE:Video recorder).

As of the date of publication, Larry Ramer did not have (directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are the author’s own, subject to the InvestorPlace.com Publishing Guidelines