The Case for Industrial and Defense Stocks in a Post-Tech Rotation World

The U.S. equity market has witnessed a dramatic shift in 2025, as investors rotated capital away from overvalued technology stocks toward industrial and defense sectors. This reallocation, driven by skepticism over AI-driven valuations and macroeconomic uncertainty, has created compelling opportunities for investors seeking resilience and earnings visibility. With President Donald Trump's $1.5 trillion defense budget and stabilizing energy prices reshaping the landscape, industrial and defense contractors like Graham, Hyster-Yale, and ESAB are poised to benefit from structural tailwinds.

Sector Rotation: From Tech to Industrials

The tech sector's dominance waned in 2025 as concerns over the profitability of AI investments and the sustainability of hyperscale spending led to a correction. According to a report by Schroders, the industrials sector delivered a robust 19.3% return in 2025, outperforming the broader market. This shift was fueled by reshoring trends, infrastructure spending, and the reinstatement of 100% bonus depreciation under the "One Big Beautiful Bill Act," which boosted capital-intensive industries. Defense stocks, in particular, gained traction as global tensions and rising defense budgets created structural demand.

Valuation Metrics: A Tale of Two Sectors

While tech stocks faced extreme valuations, defense and industrial firms presented a mixed picture. Established players like Lockheed Martin traded at a P/E of 16, while newer defense tech firms like Kratos and Palantir carried multiples exceeding 100 and 190, respectively according to Schroders data. Morgan Stanley upgraded L3Harris and General Dynamics to Overweight in late 2025, citing their alignment with long-term government contracts. Meanwhile, undervalued aerospace and defense stocks such as Momentus and Nauticus Robotics showed significant gaps between intrinsic value and market price. This divergence highlights a sector transitioning from traditional contracts to high-tech innovation, driven by AI and autonomous systems.

Trump's Defense Budget: A Double-Edged Sword

President Trump's 2025 defense budget, part of a broader $1.5 trillion fiscal plan, has reshaped the industry. While the budget promises increased spending on shipbuilding, missile defense, and precision weapons, it also imposes strict financial restrictions on contractors. Executive orders cap defense executive pay at $5 million and ban stock buybacks unless companies reinvest in production capacity. These measures aim to prioritize military readiness over shareholder returns but risk creating short-term volatility. For example, Raytheon (RTX) faced threats of contract loss unless it accelerated plant investments.

Despite these pressures, the sector remains attractive. The Trump administration's emphasis on commercial solutions and streamlined procurement-via Other Transaction Agreements (OTAs)-has accelerated innovation. Additionally, the FY2026 budget includes $62 billion for nuclear forces and $25 billion for Golden Dome missile defense programs, ensuring long-term demand for industrial and defense firms.

Energy Prices and Industrial Margins

Stabilizing energy prices have provided a buffer for industrial firms. While Hyster-Yale faced $40 million in tariff costs in Q3 2025, its operating cash flow improved to $37 million as it optimized inventory efficiency. Similarly, Graham Corporation's 21% revenue growth in Q4 2025 was supported by margin expansion and strong demand. ESAB Corporation, meanwhile, leveraged its EWM acquisition to boost Equipment and Automation segment growth, raising full-year EBITDA guidance to $535–$540 million. These performances underscore the sector's ability to navigate macroeconomic headwinds.

Strategic Entry Points: Graham, Hyster-Yale, and ESAB

Graham Corporation (Graham): With a 13% sales growth in 2025 and a 330-basis-point gross margin expansion, Graham's focus on industrial equipment and its strong cash flow generation make it a compelling buy. Its recent contract wins in energy and defense sectors align with Trump's reshoring agenda.

Hyster-Yale Group (HY): Despite tariff-related challenges, Hyster-Yale's $7.6 million contract for 4K electric forklifts with the Navy highlights its relevance in defense logistics. The company's strategic investment in East Carolina University's research campus positions it to benefit from future defense tech advancements.

ESAB Corporation (ESAB): ESAB's 8% revenue growth and $133 million in adjusted EBITDA in Q3 2025 reflect its resilience in industrial markets. Its acquisition of EWM and React technology integration have enhanced its competitive edge, making it a strong candidate for long-term growth.

Conclusion: A Post-Tech World of Opportunity

The rotation from tech to industrials and defense in 2025 has created a favorable environment for investors. While Trump's budget introduces regulatory risks, the sector's structural demand, valuation discounts, and alignment with macro trends (e.g., reshoring, AI-driven innovation) justify a strategic allocation. For companies like Graham, Hyster-Yale, and ESAB, current price corrections-driven by short-term challenges-present attractive entry points in a sector poised for sustained growth.