In early trading on Jan. 8, after President Donald Trump declared he would seek a $1.5 trillion fiscal 2027 defense budget, shares of US defense contractors appreciated by as much as 5% (all returns in this article are measured on a US dollar basis).
Bulls say: While across-the-board increases in military procurement spending would likely benefit existing and new defense contractors broadly, those most closely aligned with the administration’s priorities—such as shipbuilding and expanding missile defense systems into space—could see particular boosts to their order books and potentially their bottom lines.
- We view a $1.5 trillion defense budget as a potential scenario at this point. It’s worth considering but far from a fait accompli.
- Moreover, on the heels of the president’s executive order prohibiting defense contractors from paying dividends or buying back shares if they fall behind on military contracts and investments in capacity, we expect future spending will have new strings attached.
The bottom line: For the moment, we are not altering our forecasts, which include robust increases to existing and prioritized programs. Our fair value estimates for US defense contractors are unchanged.
- In our estimation, US defense contractors remain mostly fairly valued after their two-day trading whipsaw, ranging from 94% of fair value for Northrop Grumman to RTX’s 111%.
