The Pentagon's Pivot: How F-35 Cuts Signal a New Era in Defense Spending and What It Means for Investors

The Pentagon's fiscal year 2026 budget proposal marks a historic inflection point in U.S. defense strategy, with steep cuts to F-35 procurement and a sharp pivot toward hypersonic weapons and next-generation systems. For Lockheed Martin (LMT), the prime contractor for the F-35 Joint Strike Fighter, this shift underscores both risks and opportunities. While reduced domestic F-35 orders threaten near-term revenue, the program's long-term health hinges on resolving technical hurdles and leveraging robust international demand. Meanwhile, the broader defense sector is undergoing a recalibration that rewards companies with exposure to emerging technologies like hypersonic missiles, space systems, and cyber defense. Investors must now reassess exposure to legacy programs versus bets on the Pentagon's future priorities.

text2imgA sleek F-35A fighter jet in flight, flanked by a futuristic hypersonic missile launch illustration, symbolizing the Pentagon's strategic shift from traditional aircraft to next-generation weapons systems./text2img

The F-35 Crossroads: Cuts, Backlogs, and International Lifelines

The Pentagon slashed Air Force F-35A purchases to just 24 aircraft in FY2026, down from 44 in FY2025, citing delays in the Technology Refresh 3 (TR-3) software upgrades. These delays have halted deliveries since 2023, creating a backlog of dozens of jets stranded at Lockheed's Texas facility. Congressional oversight has further restricted acceptance of 20 jets until unresolved software, radar, and sustainment issues are addressed.

However, international demand remains a critical lifeline. With a $176 billion backlog as of late 2024, key allies like the UK (targeting 60–80 jets), Italy (90), the Netherlands (52), and Australia (72) are driving orders. This has reduced U.S. procurement dependence to 55% of total orders, down from 70% a decade ago. Lockheed's ability to rebound hinges on resolving TR-3 delays by late 2025, unlocking a potential “pent-up demand” scenario and enabling deliveries of 170–190 jets annually.

The Pentagon's Strategic Pivot: Hypersonics and the Rise of Next-Gen Systems

The budget's $179 billion RDT&E allocation (a 26.8% increase over FY2025) prioritizes hypersonic weapons and sixth-generation platforms over legacy aircraft. Key shifts include:

1. Hypersonic Weapons:
2. Air Force funding for the FAMM (Family of Affordable Mass Missile) and Dark Eagle programs totals $656 million, while the Army allocates $438 million for Dark Eagle and $802 million for hypersonic attack cruise missiles.

3. The Space Force's Golden Dome initiative secures $6.4 billion for space-based missile tracking systems, critical for countering hypersonic threats.

4. Next-Gen Fighters:

5. The Air Force's F-47 sixth-generation fighter receives $3.5 billion, while the Navy's F/A-XX program faces drastic cuts ($75 million vs. $1 billion projected), risking cancellation.

6. Space and Cyber Defense:

7. The Space Force's RDT&E budget surges to $29 billion, funding programs like Resilient Missile Warning-LEO ($2.58 billion) and Long Range Kill Chains ($6.4 billion).
8. Cyber Command's RDT&E funding jumps to $1.37 billion, reflecting growing emphasis on digital warfare.

Risks to Lockheed's Stock Valuation

• Technical Execution: Persistent TR-3 delays beyond 2026 could prolong production lulls, pressuring LMT's stock. A failure to meet Block 4 upgrade milestones (hypersonic compatibility, advanced electronics) would erode the F-35's export appeal.
• Budget Uncertainty: ~$51 billion of the Pentagon's procurement funding depends on reconciliation bills. A legislative impasse could slash defense spending by 24%, exacerbating F-35 cuts.
• Competitor Pressure: Rivals like Sweden's Gripen E and France's Rafale—cheaper non-stealth options—could attract buyers if F-35 delays persist.

Investment Strategy: Diversification is Key

While Lockheed remains a long-term hold due to its global F-35 footprint, investors should reduce reliance on single-program exposure. Consider:

1. Hypersonic Winners:
2. Raytheon Technologies (RTX) and Northrop Grumman (NOC) benefit from hypersonic missile contracts.

3. Boeing (BA) gains through its role in the Collaborative Combat Aircraft (CCA) drone program.

4. Space and Cyber Plays:

5. Palantir (PLTR) and Askinosie & Co. (ASLN) dominate Pentagon cyber initiatives.

6. Maxar Technologies (MAXR) supports space-based missile tracking systems.

7. Diversified Contractors:

8. General Dynamics (GD) and L3Harris (LHX) balance traditional and next-gen programs, offering stability.

Conclusion: The Pentagon's New Playbook

The FY2026 budget signals a strategic shift toward cost efficiency and next-gen dominance, with hypersonics and space systems taking precedence over legacy aircraft. While Lockheed's F-35 program faces near-term headwinds, its international sales and the potential for TR-3 resolution position it as a multi-decade bet—provided execution aligns. Investors should pair a “hold” on LMT with selective exposure to firms like RTX, NOC, and MAXR, which are better positioned to capitalize on the Pentagon's pivot. In a sector where technical execution and geopolitical dynamics reign, diversification is not just an option—it's a necessity.