Defense Winners: Which Stocks Are Positioned to Capitalize on the $1.5T Pledge?

The catalyst for this week's volatility was a sharp policy shift from President Trump. On Wednesday afternoon, he issued a directive demanding defense companies halt share buybacks, refrain from paying dividends, and cap executive pay at $5 million. This move triggered an immediate sell-off, with major firms like General Dynamics, Northrop Grumman, Lockheed Martin, and Raytheon parent RTX seeing their shares pushed sharply lower. The criticism intensified when Trump specifically called out Raytheon, threatening to cut ties with the company.

The market's reaction was a classic case of event-driven whipsaw. Just two hours and nine minutes after his initial post, he announced he was raising the 2027 U.S. military budget to $1.5 trillion. This pledge sparked a rally in those same defense stocks on Thursday, effectively neutralizing the earlier sell-off. The pattern is now being dubbed the "TUNA trade" – Trump Usually Negates Announcements – where a bearish statement is countered by a bullish one, creating a volatile but often profitable setup for traders.

The price moves underscore the event's immediate impact. On Thursday, Northrop Grumman climbed 3.8%, Lockheed Martin soared 4.5%, and L3Harris Technologies jumped 5.4%. The rally extended globally, with Europe's aerospace and defense index hitting a new all-time high and stocks like BAE Systems rising around 6%. The episode leaves the sector's future uncertain, but it clearly demonstrated how quickly sentiment can flip on a single policy announcement.

The Tactical Setup: Winners from the $1.5 Trillion Pledge

The immediate market reaction to the $1.5 trillion pledge has been a clear winner-take-all rally. The beneficiaries are split between traditional prime contractors and the newer, intelligence-driven platforms that are becoming essential for modern warfare.

On the European front, the rally hit record highs. Shares in the region's arms makers surged, with BAE Systems rising around 6% and Germany's Rheinmetall up around 3%. This move is a direct play on the spending signal, as European defense firms are deeply integrated into U.S. supply chains and stand to gain from any major budget increase.

In the U.S., the early 2026 gains are even more pronounced. The rally following the spending pledge has extended the sector's stellar run, with L3Harris Technologies advancing 11% across the first five trading days of the year. Major peers are also climbing, as Northrop Grumman has risen about 4% or more since the policy flip-flop. This setup is textbook event-driven momentum, where the initial sell-off on Wednesday was quickly reversed by the bullish spending promise on Thursday.

A more niche but telling winner is Palantir Technologies. Its recent contract renewal highlights a critical shift within defense spending. The company secured a three-year extension with France's domestic intelligence agency, the DGSI. This isn't just about data storage; it's a vote of confidence in the growing market for intelligence platforms that can compress decision-making time. As the global military AI market is projected to triple by 2035, Palantir's renewal signals that demand for these specialized, high-speed analytics tools is accelerating alongside the broader budget increase.

All these moves are now embedded in the sector's new operating rhythm: the "TUNA trade." The pattern is clear. A bearish policy announcement-like the buyback ban-triggers a sell-off. Then, a bullish spending pledge quickly reverses the trend. For traders, the setup is to buy the dip on spending promises, as the market's reaction to the $1.5 trillion figure has shown.

Catalysts and Risks: The Near-Term Path

The bullish setup is now live, but its durability hinges on a few near-term tests. The primary catalyst is the actual legislative path for the $1.5 trillion 2027 budget. This pledge is the core reason for the rally, but it remains a proposal. The real test is whether Congress passes it, and at what level. Analysts note it's likely a starting point for negotiation, with some expecting a final figure closer to $150 billion in new funding. Any significant downscaling would quickly deflate the sector's recent gains.

A more immediate risk is the follow-through on Trump's earlier directive. The executive order demanding an end to buybacks and dividends is still on the books. While analysts argue it's not "draconian" and may be offset by spending, it introduces a new cost of capital for the sector. The market's reaction to the policy flip-flop shows it's highly sensitive to these signals. If the administration enforces the restrictions, it could pressure valuations, especially for companies with high cash flows and a history of shareholder returns. As noted, large-cap defense companies will feel the squeeze more than their tech-focused peers.

Geopolitical shifts also pose a direct threat to the sector's narrative. The rally is built on a "dangerous world" premise, with tensions in Ukraine, Venezuela, and the Indo-Pacific driving spending. A sudden, unexpected ceasefire in Ukraine could quickly reduce the perceived security threat, creating a major setback for defense stocks. The market's appetite for these shares is reactive; it needs ongoing conflict to justify the premium.

The bottom line is a high-stakes, event-driven setup. The $1.5 trillion pledge created a powerful catalyst, but it's not a guarantee. Traders must watch for two things: the budget's legislative progress and any enforcement of the capital restriction order. The sector's recent momentum is fragile, resting on the assumption that the spending promise will materialize and that geopolitical tensions remain elevated. Any deviation from that script could trigger the next sharp move.