FEATURED

Defense Stocks in 2026: The Budget Hit $1 Trillion

Published May 10th, 2026

A trillion dollars. That’s the number.

The Pentagon’s total national defense budget request for fiscal 2026 came in at approximately $961 billion – including $113 billion in funding from the 2025 reconciliation act – with senior Defense Department officials characterizing the overall national defense figure at roughly $1 trillion. Germany approved a record €108.2 billion defense budget for 2026, a 24% year-over-year jump that positions Berlin to become NATO’s second-largest capability package. Japan’s cabinet greenlighted a $58 billion defense budget for fiscal 2026 – a 3.8% increase and the 12th consecutive record high. The rearmament wave is global, broad-based, and backed by legislation.

The question for bargain hunters isn’t whether the trend is real – it clearly is. The question is whether the stocks still offer value after the run-up, or whether you’re walking into a crowded trade at the wrong price.

Slight tangent, but it matters: the geopolitical backdrop driving this isn’t temporary. Structural procurement programs tied to NATO commitments, Indo-Pacific security concerns, missile defense buildouts, and drone warfare development are encouraging governments to lock in multi-year spending. Germany’s 2026 budget projects increases annually toward €152 billion by 2029 to hit NATO’s 3.5% of GDP target. Japan’s five-year Defense Buildup Program would bring annual spending to around $64 billion, potentially making it the world’s third-largest spender. That’s different from a wartime spending surge that evaporates when a conflict ends.

Where the Value Still Lives

Not every defense name is expensive. The sector has bifurcated sharply.

On one end, you have momentum-driven names like Palantir and Kratos trading at over 100 times forward earnings. That’s not a bargain – that’s a prayer.

On the other end, the large-cap traditional contractors have run, but several still carry reasonable multiples when you factor in backlog visibility and earnings growth. Defense stocks tend to trade at a discount to the broader market precisely because they’re seen as slow-growth industrials – but that assumption is getting tested in real time.

• Northrop Grumman (NOC): Q1 2026 revenue of $9.88 billion beat expectations, with EPS of $6.14 topping estimates by roughly 1%. Management reaffirmed 2026 sales guidance of 3.7%–4.9% growth. What’s interesting is that this guidance conservatively excludes potential upside from accelerated B-21 production, a possible F/A-XX down-select decision expected in August, and awards tied to the Golden Dome missile defense program. Current analyst consensus price target sits around $641–$745 depending on the firm, against a recent share price near $549 – suggesting the market is pricing in execution uncertainty rather than the full upside scenario. NOC is trading near the bottom of its 52-week range.
• RTX Corporation (RTX): In February 2026, Raytheon – an RTX business – entered into five landmark up-to-seven-year framework agreements with the Pentagon to significantly increase production of Tomahawk cruise missiles, AMRAAM, SM-3, and SM-6 munitions. Target rates: Tomahawks to over 1,000 annually, AMRAAMs to at least 1,900. RTX is also investing $3.1 billion in capital spending in 2026 to support these ramp commitments. The diversified aerospace and defense mix provides a hedge – commercial aerospace earnings offset near-term defense contract timing gaps.
• Howmet Aerospace (HWM): The under-the-radar name. Howmet makes the precision metal components that go inside jet engines and structural airframes – the picks-and-shovels play within defense aerospace. Q1 2026 results: total revenue up 19% year over year to $2.31 billion, defense aerospace revenue up 10%, gas turbines revenue up 39%, adjusted EBITDA margin expanded to 32.0%. The company raised full-year 2026 guidance to $9.575–$9.725 billion in revenue with adjusted EPS of $4.88–$5.00. Full-year 2025 defense aerospace was up 21% year over year. The growth trajectory has not slowed – it has accelerated. The stock trades rich, but the earnings are real.
• GE Aerospace (GE): A $5 billion Air Force IDIQ contract for F110-GE-129 engines anchors defense-side visibility. Q1 2026 delivered adjusted EPS of $1.86 – up 25% year over year and well ahead of the $1.61 consensus. Total orders jumped 87% in the quarter. Defense & Propulsion Technologies revenue grew 19% to $3.2 billion. Management is guiding to low double-digit total revenue growth for 2026 with adjusted EPS of $7.10–$7.40, and trending toward the high end of the range after the strong Q1 start.

The ETF Path

If individual stock selection feels too concentrated for the risk environment, the iShares U.S. Aerospace & Defense ETF (ITA) – with roughly $13.8 billion in assets as of early May 2026 – gives you broad sector exposure. ITA returned approximately 48.7% in calendar year 2025, per the fund’s own fact sheet. That’s a substantial run. But with the earnings backdrop improving and global spending commitments extending multi-year, the structural case for the sector hasn’t evaporated.

What Could Go Wrong

Two things bear watching. First, valuations aren’t universally cheap – several sector leaders look extended on a short-term basis, and any slowdown in contract awards or program delays could weigh on names already priced for optionality. Second, any meaningful de-escalation in Ukraine or the Middle East could take wind out of near-term sentiment, even if the long-term spending commitments remain structurally intact.

A trillion-dollar budget is a floor, not a ceiling. The harder question is figuring out which companies turn that spending into durable earnings – and which ones are just along for the ride.

That’s the research worth doing.