Defense Dollars Diverted: Missiles and Drones Overtake F-35 Dominance in Pentagon Priorities

The U.S. military's fiscal year 2026 budget proposal, unveiled with characteristic bluster by President Donald Trump, marks a seismic shift in defense spending priorities. While the total defense budget remains flat at $892.6 billion, the allocation of those funds signals a strategic pivot toward missiles, drones, and asymmetric warfare tools—at the expense of traditional platforms like the F-35 fighter jet and large naval vessels. This realignment, driven by lessons from Ukraine and geopolitical tensions in the Indo-Pacific, offers investors a clear roadmap to capitalize on emerging defense trends.

The F-35's Declining Star

The most striking cut in the budget is the reduction of F-35 purchases to just 47 jets—a 31% drop from the Biden administration's 2025 request of 68. While the House Appropriations Committee is pushing back with a draft bill proposing 69 F-35s, the writing is on the wall. The Pentagon's calculus is simple: stealth fighters are no longer the linchpin of 21st-century warfare.

Lockheed Martin, the F-35's primary contractor, faces immediate headwinds. The company's stock has underperformed the broader market in the past year amid fears of reduced orders. Yet investors should look beyond the headlines: Lockheed's diversified portfolio in missiles and drones positions it to thrive in this new era.

The Rise of Missiles and Drones: Precision Over Platforms

The budget's true winners are long-range missiles and drone systems, prioritized for their cost-effectiveness and strategic relevance. Key investments include:
- JASSM-ER (Joint Air-to-Surface Standoff Missile – Extended Range): A stealthy, 500-mile-range missile ideal for striking high-value targets.
- LRASM (Long-Range Anti-Ship Missile): Designed to neutralize adversary naval forces at standoff ranges.
- PrSM (Precision Strike Missile): A land-based missile replacing the aging ATACM, now being deployed to Ukraine.

These systems, all produced by Lockheed, exemplify the Pentagon's focus on precision strike capabilities. Unlike multi-billion-dollar aircraft carriers or fighters, missiles are scalable and adaptable to rapid threats. A single JASSM-ER costs roughly $800,000—a fraction of an F-35's $90 million price tag, yet capable of achieving similar strategic objectives.

The Ukraine conflict has underscored this shift: drones and missiles have proven decisive in asymmetric warfare, enabling smaller nations to counter larger adversaries. The budget's emphasis on small drones, such as the Switchblade loitering munition, reflects this reality. Companies like AeroVironment (AVAV), a leader in tactical drones, are poised to benefit as the Pentagon scales up these programs.

Congress and the Geopolitical Backdrop

Despite the Trump administration's cuts, congressional pushback remains a wildcard. The House's proposed F-35 numbers hint at bipartisan support for maintaining air superiority, but the larger trend is undeniable. The $150 billion “One Big Beautiful Bill Act” includes funding for missile defense systems like Trump's Golden Dome, further cementing the missile-first strategy.

The Indo-Pacific pivot is central to this realignment. China's rapid military modernization demands long-range, networked systems to counter its anti-access/area-denial (A2/AD) capabilities. Missiles and drones, integrated with artificial intelligence and sensors, are the answer.

Risks and Opportunities for Investors

While the strategic shift is clear, risks persist. A change in administration or defense leadership could reverse course, and budget battles in Congress may dilute allocations. However, the long-term logic is compelling: missiles and drones offer scalability, affordability, and relevance to modern threats.

Investment thesis:
- Buy Lockheed Martin (LMT): Despite F-35 cuts, its dominance in missiles and drones secures its place in this new order.
- Consider AeroVironment (AVAV): Small-cap exposure to tactical drone demand.
- Watch Raytheon Technologies (RTX): A major player in missile defense systems like Golden Dome.

Avoid overexposure to shipbuilders and traditional platform manufacturers, such as Huntington Ingalls Industries (HII), as naval procurement faces sustained cuts.

Conclusion: The New Rules of War

The Pentagon's budget reflects a stark truth: the era of the multi-role fighter is waning. Investors who align with the rise of missiles, drones, and precision strike systems will be positioned to profit from a defense landscape reshaped by cost discipline and geopolitical necessity. As the U.S. prepares for 21st-century conflicts, the question isn't just what to buy—but how to fight smarter, not bigger.

The defense sector is undergoing its most significant transformation in decades. Follow the money—and the missiles.