The defense sector is experiencing its strongest start to a year in decades, propelled by President Trump's stunning proposal to increase the military budget to $1.5 trillion for fiscal year 2027. The announcement has sent defense stocks soaring and triggered a fundamental reassessment of the industry's growth trajectory.

The Historic Budget Proposal

"I have determined that, for the Good of our Country, especially in these very troubled and dangerous times, our Military Budget for the year 2027 should not be $1 Trillion Dollars, but rather $1.5 Trillion Dollars," Trump posted on social media in early January.

The proposed 50% increase from current spending levels would represent the largest peacetime military budget expansion in American history. For context, U.S. defense spending totaled approximately $886 billion in fiscal year 2024 and $968 billion in fiscal year 2025. The jump to $1.5 trillion would add roughly $500 billion annually to military expenditures.

If implemented, the proposal would increase defense spending by $5 trillion through 2035, adding an estimated $5.8 trillion to the national debt when interest costs are included, according to the Committee for a Responsible Federal Budget.

Market Reaction

Defense stocks witnessed what analysts described as a "historic rally" following the announcement. The sector has extended last year's stellar performance, with geopolitical tensions and increased spending expectations driving sustained gains.

Among the major contractors:

  • Lockheed Martin rose more than 4% in the days following the announcement, extending its position as the world's largest defense contractor
  • Northrop Grumman gained approximately 4%, benefiting from its focus on strategic systems and space
  • L3Harris Technologies advanced 11% across the first five trading days of 2026
  • Huntington Ingalls Industries also jumped 11%, reflecting increased emphasis on naval capabilities
  • RTX Corporation (formerly Raytheon) rose 4% on increased demand for precision munitions and air defense systems

Smaller defense companies saw even more dramatic moves. Kratos Defense & Security Solutions surged 12%, while drone maker AeroVironment has jumped over 40% since the start of 2026.

The Executive Order Twist

The rally came despite—or perhaps because of—an executive order that initially spooked investors. On January 7, Trump signed an order targeting defense contractors who put "stock buybacks and excessive corporate distributions ahead of production capacity, innovation, and on-time delivery for America's military."

The order requires the Defense Department to review contractor performance and implement restrictions on companies that prioritize shareholder returns over production capabilities. The announcement initially sent defense stocks lower as investors worried about constraints on capital returns.

However, the subsequent budget proposal quickly reversed sentiment. The calculus became clear: even if buybacks are restricted, a 50% increase in the addressable market dwarfs any concerns about capital allocation.

"Investors realized pretty quickly that a $500 billion increase in spending trumps any concerns about buyback restrictions," observed Roman Schweizer, defense analyst at Cowen. "This is a rising tide that will lift all boats in the sector."

Where the Money Would Go

While detailed budget allocations have not been released, the administration has signaled priorities that would shape spending:

  • Naval expansion: Increased shipbuilding to counter China's growing fleet, benefiting Huntington Ingalls and General Dynamics
  • Air superiority: Continued investment in sixth-generation fighters and drone swarms, benefiting Lockheed Martin and Northrop Grumman
  • Missile defense: Expanded systems to counter hypersonic threats, benefiting RTX and Lockheed Martin
  • Space capabilities: Enhanced satellite constellations and anti-satellite systems, benefiting Northrop Grumman and L3Harris
  • Munitions stockpiles: Replenishment of inventories depleted by aid to Ukraine, benefiting nearly all major contractors

Fiscal Reality Check

Whether the $1.5 trillion proposal can survive the legislative process remains an open question. Even with Republican control of Congress, fiscal hawks have expressed concern about adding nearly $6 trillion to the national debt over a decade.

The Congressional Budget Office has not yet scored the proposal, but preliminary estimates suggest it would require either significant tax increases, cuts to domestic programs, or a willingness to accept substantially higher deficits.

"There's a real question about whether this is a serious proposal or an opening bid," noted Todd Harrison, defense budget expert at the American Enterprise Institute. "The actual appropriation could be significantly lower."

However, even a scaled-back version of the proposal would represent substantial growth. If Congress ultimately appropriates $1.2 trillion rather than $1.5 trillion, that still represents a roughly 25% increase from current levels—enough to sustain defense sector growth for years.

The Geopolitical Context

The budget proposal arrives amid elevated geopolitical tensions across multiple theaters. The war in Ukraine continues with no clear resolution in sight, while Iran's domestic crisis adds another source of instability. Taiwan tensions simmer, and North Korea has resumed provocative missile tests.

This environment provides political cover for increased defense spending. Public polling consistently shows support for maintaining military strength, even among voters who are skeptical of other government spending.

"The threat environment has shifted dramatically from a decade ago," observed Mackenzie Eaglen, senior fellow at the American Enterprise Institute. "China's military modernization, Russia's aggression in Ukraine, and instability in the Middle East all argue for increased investment."

Investment Implications

For investors, the defense sector presents a compelling near-term opportunity with longer-term uncertainties. The proposed budget creates a clear catalyst for continued gains, while the executive order on contractor behavior bears watching.

Diversified defense ETFs like the iShares U.S. Aerospace & Defense ETF (ITA) or SPDR S&P Aerospace & Defense ETF (XAR) offer broad exposure to the sector's growth without concentration in individual names.

Among individual stocks, analysts highlight different opportunities:

  • Lockheed Martin: The largest beneficiary of increased fighter and missile programs
  • Northrop Grumman: Strongest positioned in strategic bombers and space systems
  • General Dynamics: Benefits from both combat vehicles and nuclear submarines
  • L3Harris: Growing presence in communications and electronic warfare

Smaller companies like AeroVironment and Kratos offer higher growth potential but with correspondingly higher risk. These names are more volatile and more dependent on specific program wins.

Looking Ahead

The defense sector's outlook has not been this bullish in years. Even accounting for inevitable legislative compromise, the direction of travel is clear: military spending is going up, potentially substantially.

For the major contractors, this means sustained revenue growth, expanding margins, and significant backlogs that provide visibility for years ahead. For investors, it means a sector that—despite recent gains—may still have room to run.

The ultimate outcome depends on political processes that remain uncertain. But one thing is clear: President Trump's $1.5 trillion proposal has fundamentally reset expectations for American defense spending, and the market is betting that reality will at least rhyme with the rhetoric.