The U.S. government is set to increase defense spending significantly, with plans for a budget of approximately $1.01 trillion for the fiscal year 2026. This anticipated surge is expected to benefit several defense stocks, although many of these plans have yet to materialize into contract awards or hiring. Investors may find this an opportune moment to reassess their portfolios as the landscape for defense spending evolves.
The White House has already appropriated around $150 billion of its proposed defense budget within the framework of the One Big Beautiful Bill Act, or OBBBA. This includes funding for key initiatives, such as the Golden Dome anti-missile program and $10.8 billion allocated for modernizing the U.S. nuclear arsenal. Additionally, both the House and Senate appropriations committees have advanced their versions of the FY2026 Defense Appropriations Act, setting the stage for future spending.
Market Dynamics and Future Opportunities
The defense sector is currently benefiting from favorable market conditions, driven by ongoing geopolitical conflicts that may require U.S. military involvement. With defense equities having already risen in value, further increases are likely as funding becomes more assured. Notably, several large initiatives await federal funding despite not being included in the recently approved National Defense Authorization Act (NDAA).
Among the key funding requests are $3.9 billion for hypersonic weapons, $3.5 billion for new F-47 fighter jets, and $15.1 billion for cybersecurity enhancements. The Defense Department has also indicated a need for approximately 300,000 drones, suggesting that companies in this sector could secure substantial contracts in the near future. Furthermore, the administration anticipates the passage of a reconciliation bill that may provide an additional $113.3 billion for the Pentagon in FY2026.
Key Defense Stocks to Monitor
Investors should keep a close eye on several defense companies poised to benefit from these spending initiatives.
Lockheed Martin (LMT) is expected to see a boost from the Pentagon’s request for 245 PAC-3/MSE missiles. The company stands to gain from a near $400 million allocation for a new hypersonic weapon as well. With a forward price-earnings ratio of 16, Lockheed is well-positioned for growth.
Similarly, Northrop Grumman (NOC) is likely to benefit from over $4 billion designated for the B-21 Raider stealth bomber and $4.1 billion for research and development related to its Sentinel intercontinental ballistic missile (ICBM) program. Northrop has a price-earnings ratio of 19.5, indicating potential for future gains.
Other notable companies include L3Harris (LHX), which specializes in hypersonic threat detection, and Rocket Lab (RKLB), both of which are positioned to capitalize on increased Space Force funding. L3Harris maintains a price-earnings ratio of 23.15, while Rocket Lab’s shares are trading at a high price-sales ratio of 51.25, suggesting that future contracts may already be somewhat reflected in their current valuations.
Palladyne (PDYN) is also noteworthy, focusing on autonomous drone technology with existing contracts with the Air Force and Navy. Despite its high price-sales ratio of 38.7, CEO insights indicate a strong position for upcoming Department of War contracts.
Lastly, RTX, a major missile producer, is expected to receive a significant portion of the $2.5 billion earmarked for increased missile production, further solidifying its position in the defense market. With a low forward price-earnings ratio of 27.4, RTX shares could see upward movement as new contracts are awarded.
As the U.S. government prepares for increased defense expenditures, the implications for investors are substantial. Careful monitoring of these defense stocks could yield significant opportunities as the funding landscape becomes clearer.
