Is Now the Time to Buy Lockheed Martin Before Defense Sector Rebalancing?

The defense sector has long been a barometer for global geopolitical tensions and fiscal policy shifts. As 2026 unfolds, Lockheed Martin (LMT) finds itself at a pivotal juncture, with valuation metrics, growth catalysts, and geopolitical tailwinds converging to shape its investment narrative. For investors weighing entry points ahead of a potential sector rebalancing, the question is whether the stock's current pricing reflects its long-term potential-or if it's being undervalued by market forces that may soon correct.

Valuation: A Discounted Premium in a High-Growth Sector

Lockheed Martin's valuation metrics as of late 2025 suggest a compelling case for relative undervaluation. The company trades at a price-to-earnings (P/E) ratio of 26.1x in December 2025, significantly below the Aerospace & Defense industry average of 36.5x–38.90x. This discount reflects a broader trend: while the sector's P/E ratio has surged to 44.4x in January 2026, Lockheed's earnings multiple remains anchored to fundamentals rather than speculative optimism.

The price-to-book (P/B) ratio further underscores this dynamic. At 19.29, Lockheed's P/B is more than four times the industry median of 4.03. While this might initially appear concerning, it highlights the market's recognition of the company's robust balance sheet and intangible assets, such as its R&D pipeline and contract backlog. A discounted cash flow (DCF) analysis suggests the stock is undervalued by 23.1%–24.1%, implying a potential upside if earnings growth aligns with expectations.

Growth Catalysts: A $1.5 Trillion Defense Budget and Strategic Innovation

The most immediate catalyst for Lockheed Martin is the proposed 2027 U.S. defense budget of $1.5 trillion, a 50% increase from the 2026 allocation. This surge, driven by heightened global tensions and President Trump's "Dream Military" agenda, positions the company to benefit from expanded demand for its core products, including F-35 fighter jets, hypersonic weapons, and space systems.

Lockheed's $179 billion contract backlog provides a critical buffer against short-term volatility, ensuring steady cash flow while the company scales production to meet surging demand. Additionally, its foray into emerging technologies-such as integrated air and missile defense systems and secure command-and-control platforms-cements its role as a leader in next-generation defense solutions. Projects like NASA's X-59 quiet supersonic jet and Artemis II further diversify its revenue streams beyond traditional defense contracts.

Geopolitical Tailwinds: A Perfect Storm of Conflict and Spending

Geopolitical dynamics in late 2025 and early 2026 have created a tailwind-laden environment for defense stocks. Global military expenditures reached $2.7 trillion in 2024, with projections of $6.6 trillion by 2035. Conflicts in Gaza, Ukraine, and the Iran-Israel standoff have spurred a 9.4% year-on-year increase in real terms, while U.S. defense spending hit $997 billion in 2024.

Domestically, Trump's executive order restricting defense contractors from stock buybacks and dividends until production benchmarks are met has redirected capital toward operational capacity. This aligns with Lockheed's strategic focus on manufacturing and infrastructure investments, reducing the risk of earnings dilution. Meanwhile, European allies, including France's €3.5 billion defense budget increase, are amplifying global demand for arms and services.

The Case for Caution: Risks and Rebalancing

Despite these positives, risks remain. The defense sector's historically high P/E ratio of 44.4x suggests a potential overvaluation if geopolitical tensions ease or fiscal constraints resurface. Additionally, the lack of granular 2027 budget allocations for Lockheed Martin means investors must rely on broader industry trends rather than company-specific guarantees.

However, the combination of a discounted P/E, a robust backlog, and a geopolitical landscape that favors sustained spending creates a compelling risk-rebalance scenario. Analysts have assigned a "Moderate Buy" consensus rating with a mean price target of $527.38, implying a 15% upside from current levels.

Conclusion: A Strategic Entry Point

For investors with a medium-term horizon, Lockheed Martin appears undervalued relative to its fundamentals and the broader sector's trajectory. The company's ability to capitalize on a $1.5 trillion defense budget, coupled with its leadership in emerging technologies and a geopolitical environment that favors prolonged spending, positions it as a defensive play with offensive upside. While valuation metrics like the P/B ratio warrant scrutiny, they reflect the market's recognition of Lockheed's long-term earnings potential.

As the defense sector braces for rebalancing in 2026, now may indeed be the time to buy-provided investors are prepared to hold through near-term volatility and capitalize on the tailwinds of a rapidly evolving global security landscape.