TLDR
- President Trump proposed a $1.5 trillion defense budget for 2027, a 50% increase from the current $1 trillion budget
- Defense stocks surged Thursday with Lockheed Martin up 5.1%, L3Harris up 6%, and Kratos Defense up 19%
- The rally followed Wednesday’s losses when Trump criticized defense contractors for buybacks and dividends
- Analysts question if the 50% increase is feasible, noting the last time this happened was during the Korean War in 1951
- Trump stated tariff collections, expected to reach $400 billion in 2026, would help fund the budget increase
Defense stocks jumped Thursday after President Donald Trump called for a $1.5 trillion military budget in 2027. The proposal represents a 50% increase from the current $1 trillion defense budget.
Trump announced the budget proposal on Truth Social late Wednesday. He stated the increase would allow the U.S. to build a “Dream Military” and keep the country safe during troubled times.
L3Harris Technologies stock jumped 6% in midday trading Thursday. Lockheed Martin shares climbed 5.1% while RTX gained 1.7%.
Lockheed Martin Corporation, LMT
Northrop Grumman stock rose 4.1% and General Dynamics increased 3.8%. Smaller drone technology companies saw even bigger gains with Kratos Defense surging 19%.
The rally reversed Wednesday’s sharp losses across the defense sector. Those drops came after Trump criticized defense contractors for issuing dividends and stock buybacks.
Trump signed an executive order Wednesday “prioritizing the warfighter in defense contracting.” He stated the industry has been too slow delivering equipment while paying “massive” dividends to shareholders.
L3Harris CEO Chris Kubasik responded to the situation in a message to employees. He said demand for military capability is increasing and expectations on the industry are higher than in decades.
Budget Feasibility Questions
Analysts are questioning whether the proposed 50% budget increase can actually happen. Capital Alpha Partners analyst Byron Callan noted the last time U.S. defense spending grew 50% in one year was 1951 during the Korean War.
The Reagan administration increased the defense budget over 20% in 1981 and 1982. Callan stated it’s unclear if defense contractors have capacity to absorb such a large increase.
The budget proposal faces political hurdles in Congress. Without budget reconciliation, which requires 50 Senate votes and cost offsets, the plan needs 60 Senate votes to pass.
Funding Through Tariffs
Trump said tariff collections would pay for the defense budget increase. Tariff collections are expected to reach approximately $400 billion in 2026.
The implication is that tariff money would be directed toward defense spending. This funding mechanism will require discussion among politicians during the midterm election year.
JPMorgan analyst Seth Seifman wrote the administration’s commentary reinforces efforts to get major defense companies to invest more. He stated this effort will likely produce results.
William Blair analyst Louie DiPalma suggested Thursday the 50% increase seems like a starting point in negotiations. The final budget number could differ from the initial proposal.
The iShares U.S. Aerospace & Defense ETF is up 55% over the past 12 months. European defense stocks also rallied with the Stoxx Europe Aerospace and Defense index adding 1.1%.
Asian defense companies saw gains as well. Mitsubishi Heavy rose 2.4% and Bharat Electronics gained 0.3%.
The defense sector gains come as geopolitical tensions remain elevated. Trump recently stated the U.S. would take control of Venezuelan oil after American forces captured President Nicolas Maduro.
