June 30 (Bloomberg) -- Goldman Sachs Group Inc. warned its clients last month that Barack Obama would be ``a negative for defense stocks'' if he became president, because he will cut weapons programs that generate the companies' biggest profits.

Boeing Co., Lockheed Martin Corp. and other military contractors may not fare any better under John McCain.

While the two presidential candidates are hammering each other over their differences on Iraq, they share a skepticism over big Pentagon programs such as Lockheed Martin's F-22 fighter and the Army's $159 billion Future Combat Systems, a modernization plan jointly managed by Boeing and SAIC Inc.

``When you get beyond the issue of the war in Iraq, Senator McCain and Senator Obama sound remarkably similar on many defense issues,'' says Loren Thompson, a defense analyst at the Lexington Institute in Arlington, Virginia.

Both have signaled they will increase overall defense spending. Still, they say the military should invest in technologies best-suited to fighting the unconventional wars of the post-Sept. 11 world -- and rethink those designed for the Cold War.

Thompson says that will likely lead them to favor building more cargo and tanker planes and developing the Littoral Combat Ship, a new Navy vessel designed for coastal operations.

That may help contractors offset some possible losses from larger programs such as the Future Combat Systems. Chicago- based Boeing builds the C-17 transport aircraft and is seeking an additional $3.9 billion order. Bethesda, Maryland-based Lockheed Martin, which is building the Air Force's C-130 cargo plane, has a $4 billion contract for 60 aircraft. Lockheed and Falls Church, Virginia-based General Dynamics Corp. are competing to build the littoral ship.

Comprehensive Review

Both McCain and Obama say they will order a comprehensive review of weapons spending early in their presidency.

McCain has cited the F-22 as one example of the cost overruns and delivery delays that he says have plagued the acquisition process. In a speech last year in Oklahoma, he said the U.S. ``must be willing to pull the plug before sinking more dollars into weapons that do not provide what our warriors need.''

The next administration must decide whether to support building more F-22s beyond the 183 already approved, at a cost of at least $175 million per aircraft.

Any president who seeks to curtail weapons-spending programs will likely face resistance from Pentagon officials and lawmakers who favor the systems and could marshal support in Congress to preserve them.

Democrats Favor Cuts

It's hardly surprising that Obama, 46, an Illinois Democrat, holds such views. Over the past three decades, Democrats in Washington have generally favored military spending cuts, according to a January analysis of Pentagon budget trends by Merrill Lynch & Co.

McCain, 71, an Arizona Republican, also approaches the Defense Department budget with skepticism, even though he is a former Navy pilot and the son and grandson of admirals.

McCain believes ``there's a huge waste in the Pentagon's acquisition system,'' says John Lehman, a McCain military adviser who served as Navy secretary under President Ronald Reagan.

While McCain hasn't reached conclusions about any specific program, he's determined to crack down on cost overruns and lack of accountability, Lehman says. ``The whole culture has evolved into a bureaucratic morass, and there's no obstacles to gold-plating.''

Lehman dismissed Wall Street concerns over the defense industry. ``To say all stocks will go down,'' he says, ``there's no way to derive that from what either candidate has said.''

Spending What's Needed

Whitten Peters, an Obama military adviser, says it's wrong to view his candidate as a reflexive Pentagon budget-cutter. He disputes the May 13 Goldman Sachs analysis that an Obama presidency would be harmful to the defense industry.

``He has said he'd spend on defense what needs to be spent, recognizing overall constraints on the budget,'' Peters says. Obama isn't going to take money from the military budget to pay for domestic programs, he says.

A spokesman for Lockheed Martin says the company isn't concerned. History shows ``that support for the national defense budget has continued irrespective of which party controls the Congress or White House,'' says Thomas Jurkowsky.

A spokesman for Boeing didn't immediately respond to a request for comment. General Dynamics spokesman Robert Doolittle and SAIC spokeswoman Laura Luke had no comment.

Campaign Money

The industry isn't tilting either way, according to one measure: campaign contributions. Its total donations to the two candidates are virtually equal, according to an analysis of campaign-finance records by the Washington-based Center for Responsive Politics: $304,534 to McCain and $299,128 to Obama from the start of the campaign through June 2.

That doesn't mean Obama and McCain agree down the line.

McCain favors a bigger increase in Army and Marine manpower. He has talked about a total manpower expansion for the two services of more than 240,000, while Obama has endorsed the currently planned boost of 92,000.

McCain would continue funding the missile-defense program, which Obama criticizes as unproven. Boeing is the prime contractor for those parts of the system based in Alaska and California. Its $15.4 billion contract expires in December, and the company is in talks to continue its work.

And McCain is prepared to keep U.S. troops in Iraq for as long as needed to stabilize the country, while Obama says he's committed to start withdrawing at a rate of one to two brigades a month.

`Strong Deterrent'

Lehman says McCain would place greater emphasis on maintaining a ``strong deterrent'' and modernizing the Air Force and Navy even while waging simultaneous conflicts in Iraq and Afghanistan.

``You've got to do both,'' Lehman says, warning that the U.S. can't ``allow the hot wars to soak up the entire modernization program.''

Peters, who was Air Force secretary under President Bill Clinton, says both candidates would face ``some hard choices'' between funding increases in troop strength or weapons programs.

Andrew Krepinevich, a Pentagon consultant and director of the Washington-based Center for Strategic and Budgetary Assessments, says whoever is elected will be in a ``race against time'' to leave an imprint on defense policies.

The budget for fiscal 2009, which begins Oct. 1, is largely in place; the Bush administration will submit its proposal for the 2010 budget as it departs in January, and Pentagon planners are already working on the 2011 budget, Krepinevich says.

Move Quickly

That means the next president must weigh in quickly, or the key decisions for most of his first term will be made before he knows it.

Krepinevich says McCain, with his military experience and tenure on the Senate Armed Services Committee, would be ``more comfortable challenging military prerogatives'' than Obama. ``To challenge the assessment of the military brass is to challenge their professional expertise,'' he says.

Michael O'Hanlon, an analyst at Washington's Brookings Institution, says both candidates will have problems paying for their priorities -- and McCain may be more inclined to view the Pentagon budget as a cash cow because he favors larger tax cuts than Obama.

``At some point, they've got to pay the piper,'' O'Hanlon says.

To contact the reporters on this story: Ken Fireman in Washington at kfireman1@bloomberg.net; Gopal Ratnam in Washington at gratnam1@bloomberg.net.

Last Updated: June 29, 2008 19:01 EDT