Defense Stock Rally Extends as Geopolitics Stays Tense

Stocks

Political

Summary:

Many stocks fell Wednesday after President Donald Trump laid out plans to limit dividends and buybacks in the sector, the cohort rebounded Thursday on his demand for a $1.5 trillion in security spending next year.

US defense stocks are off to a strong start in 2026, extending last year’s stellar performance as geopolitical tensions ratchet higher and military spending plans rise to match them.

Contractors L3Harris Technologies Inc. and Huntington Ingalls Industries Inc. have advanced 11% across the first five trading days of 2026, buoyed in part by a rally following the US military operation that removed Venezuela’s Nicolas Maduro from power. Major peers such as Northrop Grumman Corp. and Lockheed Martin Corp. have risen about 4% or more, while drone maker AeroVironment Inc. has jumped over 40%.

While many of the stocks fell Wednesday after President Donald Trump laid out plans to limit dividends and buybacks in the sector, the cohort rebounded Thursday on his demand for a staggering $1.5 trillion in security spending next year.

These early advances build on outperformance last year, when L3Harris advanced 40% and Northrop gained 22%. Investors were drawn to the sector by the promise of rising security spending around the world, while upstarts like AeroVironment have been seen as bets on the changing nature of war. Defense Stock Rally Extends as Geopolitics Stays Tense_1

Defense Stock Rally Extends as Geopolitics Stays Tense_1

There are corners of the market primed to drive more gains this year, such as Lockheed Martin — whose stock lagged peers significantly last year, said Jay Hatfield of Infrastructure Capital Advisors.

“This more hawkish administration plus reasonable valuation makes for excellent risk-reward,” said Hatfield, chief investment officer for the Infrastructure Capital Equity Income ETF. That fund owns Lockheed.

A ‘Dangerous’ World

Peers around the world also advanced Thursday. Gainers in Europe included BAE Systems Plc and German heavyweight Rheinmetall AG, with shares up 5% and 1.4%, respectively. Asian defense stocks that rose included South Korea’s Hanwha Aerospace Co., Taiwan’s Aerospace Industrial Development Corp. and Japan’s Howa Machinery Ltd. Defense Stock Rally Extends as Geopolitics Stays Tense_2

Defense Stock Rally Extends as Geopolitics Stays Tense_2

The latest gains in defense build on years of outperformance for a sector that has been a focus for investors since Russia’s invasion of Ukraine upended the geopolitical order. Trump set out last year to push allies in Europe and Asia to spend more on their own security, while planning ambitious programs at home, such as the Golden Dome missile-defense system.

Now he’s floated an increase in defense spending for next year of roughly $500 billion on the heels of an operation in Venezuela that, the White House has suggested, could keep the US military involved in the region for years to come. Tensions between the US and China, meanwhile, show no signs of dissipating.

The $1.5 trillion request is “a big number, but at the same time the world’s changing,” said Tony Bancroft, portfolio manager for the Gabelli Commercial Aerospace and Defense ETF. Geopolitical instability drives spending, he said, and “the world is just becoming a dangerous place.”

That figure would juice profit for major players, with Jefferies analyst Sheila Kahyaoglu estimating an 13% boost to Northrop Grumman’s earnings per share and 11% for General Dynamics Corp. Smaller companies, including AeroVironment and Karman Holdings Inc., could be among the biggest beneficiaries, according to William Blair.

The figure “seems like the starting point in a negotiation,” William Blair analyst Louie DiPalma cautioned. It’s more likely that Congress will approve a military funding boost on the order of the $150 billion included in last summer’s tax and spending bill, he said in a note.

New Restrictions

Trump on Wednesday also signed an executive order demanding major US defense firms that work with the government end stock buybacks and stop issuing dividends. It was the administration’s latest attempt to push contractors to speed weapons development, with Defense Secretary Pete Hegseth saying last year that companies needed to do so or “fade away” — and it spurred a drop that some of the largest names have not fully recouped Thursday.

“We wouldn’t be surprised to see some upward pressure on capex estimates and perhaps some near-term limitations on share repo expectations when contractors offer their 2026 guidance shortly,” JPMorgan analyst Seth Seifman told clients.

Even before the order, there was a risk that investors had gotten over their skis.

Though some players trade at a discount to the broader market, valuations have climbed for leaders such as RTX. Drone maker Kratos Defense & Security Solutions Inc. and military technology player Palantir Technologies Inc. trade at well over 100 times the next 12 month’s estimated earnings.

Major players including RTX and Lockheed look overbought on a short-term basis, setting them up for a pullback that would present a chance to buy the dip, according to Matt Maley, chief market strategist at Miller Tabak + Co.

An end to the war in Ukraine presents another near-term risk, said Matt Gertken, chief geopolitical strategist at BCA Research. Negotiations to resolve the conflict are ongoing after a breakthrough on security guarantees for Kyiv.

A ceasefire, Gertken said, “will create a setback — and a buying opportunity — for defense stocks.”

Source: Bloomberg

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