Defense Contractors: Navigating Pentagon Cuts and Congressional Spending to Find Growth

The U.S. defense sector is at a crossroads. The Pentagon's FY2026 budget proposal, which prioritizes next-gen systems like the B-21 bomber and hypersonic weapons while slashing legacy programs such as the F-35 Joint Strike Fighter, has sparked a fierce clash with Congress. This tension between short-term fiscal constraints and long-term strategic needs creates a unique opportunity for investors. Companies aligned with congressional priorities—such as submarine production, missile defense, and B-21 funding—stand to benefit, even as the Pentagon's cuts threaten others.

F-35 Procurement: A Congressional Counterpunch

The Pentagon's proposal to halve F-35 procurement to just 24 Air Force jets (from 44 in FY2025) has drawn sharp pushback. The House Appropriations Committee's draft bill for FY2026 maintains funding for 69 F-35s, signaling a refusal to accelerate the program's wind-down. This divergence highlights a critical point: Congress sees the F-35 as a cornerstone of air dominance, while the Pentagon seeks to shift funds to newer platforms like the Boeing F-47.

For investors, this creates a paradox. Lockheed Martin (LMT), the F-35's prime contractor, faces near-term uncertainty but is insulated by congressional backing. A would reveal its resilience despite Pentagon cuts. While LMT's stock dipped in early 2025 on budget concerns, its backlog of international orders and congressional support suggest it will weather the storm.

B-21 Bomber: A Growth Catalyst, But Reliant on Reconciliation

The Air Force's B-21 Raider program is a clear winner in the Pentagon's plan, with $4.7B requested in FY2026—$2.1B of it tied to the reconciliation bill. Northrop Grumman (NOC), the prime contractor, stands to gain significantly if the bill passes. The B-21's advanced stealth and payload capacity make it a strategic asset, and Congress has shown bipartisan support for modernizing bomber fleets.

However, the program's success hinges on reconciliation's passage. A would underscore its sensitivity to legislative risks. Even so, the B-21's long-term demand potential—projected to replace aging B-52s and B-1s—makes NOC a buy for investors willing to bet on bipartisan alignment.

Submarine Programs: Congress vs. Pentagon on Undersea Dominance

The Navy's submarine budget faces a stark divide. The Pentagon's base request for two Virginia-class submarines and one Columbia-class ballistic missile sub falls short of congressional goals. The House's FY2026 bill mandates six battle-force ships, including three submarines, while the Senate criticizes underfunding of Columbia-class production.

General Dynamics (GD) (via Electric Boat) and Huntington Ingalls (HII) (builder of Virginia-class subs) are positioned to benefit from this congressional resolve. A would show how their fortunes are tied to legislative outcomes. Even if the Pentagon's budget limits near-term growth, GD and HII can leverage their monopolies in submarine construction to secure multiyear contracts.

Missile Defense: A Silver Lining in an Uncertain Budget

Congressional mandates are driving growth in missile defense, particularly for the Terminal High Altitude Area Defense (THAAD) system. The Pentagon's request for 37 THAAD units in FY2026 (up from 12 in FY2025) reflects a bipartisan focus on countering North Korean and Chinese threats. The Golden Dome initiative, funded at $25B in the Senate's reconciliation bill, further elevates companies like Raytheon Technologies (RTX) (THAAD producer) and Lockheed Martin (hypersonic interceptor developer).

A would highlight RTX's exposure to this booming sector. With THAAD upgrades and Guam defense spending rising, RTX could outperform peers even as other Pentagon programs shrink.

Investment Strategy: Ride the Congressional Wave

The key to profiting here is to align with congressional mandates, not just Pentagon plans. While the reconciliation bill's outcome remains uncertain, its $150B price tag ensures that critical programs like the B-21 and submarine production will secure funding eventually.

• Buy Northrop Grumman (NOC): The B-21's prime contractor, with a clear path to multiyear contracts.
• Hold Lockheed Martin (LMT): F-35 cuts are offset by international sales and congressional pushback.
• Overweight Submarine Builders: General Dynamics (GD) and Huntington Ingalls (HII) benefit from bipartisan naval modernization goals.
• Add Raytheon (RTX): Leverage missile defense tailwinds and Golden Dome allocations.

Avoid Boeing (BA), which faces headwinds from F/A-18 phase-outs and delays in its F-47 program.

Conclusion: Congress Holds the Keys

The Pentagon's budget is a starting point, not the final word. Congress's role in dictating spending priorities—particularly for submarines, missile defense, and B-21 production—ensures long-term demand for key contractors, even amid short-term fiscal uncertainty. Investors who bet on companies with congressional tailwinds will be positioned to profit as Washington's defense spending priorities take shape.

Monitor this space closely: A reconciliation bill failure would disrupt timelines, but the structural need for modernization will keep these contractors in play. For now, the legislative branch's spending push is a buy signal.