The defense sector roared back to life Thursday after President Donald Trump unveiled an ambitious plan to boost military spending to $1.5 trillion for fiscal year 2027, a jaw-dropping increase that would represent the largest peacetime military buildup in American history.

Shares of Northrop Grumman surged as much as 5.7%, while Lockheed Martin gained approximately 6%. RTX Corporation climbed roughly 3%, and General Dynamics added about 4% as investors rushed to position themselves for what could be a multi-year windfall for the defense industrial base.

From 'Stick' to 'Carrot' in 24 Hours

The rally marked a dramatic reversal from Wednesday's session, when defense stocks tumbled after the administration announced an executive order restricting dividend payments and stock buybacks for major contractors. Lockheed Martin and Northrop Grumman both dropped more than 5% on that news.

But Thursday's proposed budget increase more than offset those concerns, as investors calculated that the potential revenue gains would dwarf any restrictions on capital returns to shareholders.

"This will allow us to build the 'Dream Military' that we have long been entitled to and, more importantly, that will keep us SAFE and SECURE, regardless of foe."

— President Donald Trump

Funding Through Tariffs

The President indicated that the massive spending increase would be funded through revenues generated by his administration's broad tariff regime. This approach, however, faces a legal challenge currently before the Supreme Court, with a ruling expected as early as January 9, 2026, on whether the President has authority to use the International Emergency Economic Powers Act (IEEPA) to fund domestic spending through trade levies.

The current defense budget stands at approximately $901 billion, meaning Trump's proposal would add roughly $600 billion in annual military spending—an increase larger than the entire defense budgets of most NATO allies combined.

Sector Outperformance Continues

Defense stocks have been among the market's strongest performers in early 2026:

  • L3Harris Technologies: Up 11% in the first five trading days of 2026
  • Huntington Ingalls Industries: Also gained 11% to start the year
  • AeroVironment: The drone maker has surged an impressive 40% since January 1

Venezuela Operation Provides Backdrop

The budget proposal comes just days after Trump ordered a U.S. military operation targeting Venezuelan leader Nicolás Maduro. While details remain classified, the operation has heightened awareness of potential military engagements in Latin America and appears to have influenced the administration's push for increased defense readiness.

What It Means for Investors

The proposed budget increase could reshape the defense investment landscape for years to come. Analysts note that if even a portion of the spending increase materializes, it would drive substantial revenue growth across the sector.

However, investors should remain mindful of several risks:

  • Congressional approval: Any budget proposal must pass through Congress, where it could face modifications
  • Tariff revenue uncertainty: The funding mechanism depends on trade policy that remains legally contested
  • Execution risk: Defense contractors must ramp up production capacity to meet increased demand
  • Capital return restrictions: The executive order limiting buybacks and dividends remains in effect

For now, the market is betting that the potential upside from a $1.5 trillion defense budget far outweighs these concerns. As one trader put it: "When the government wants to spend this much on defense, you don't fight it—you figure out who's going to build it."