Trump's $1.5T Defense Budget and Its Impact on U.S. Aerospace and Defense Stocks

The U.S. defense sector is on the cusp of a seismic shift. President Donald Trump's proposed $1.5 trillion defense budget for fiscal year 2027-a 50% increase from the current $901 billion-has ignited a frenzy of speculation about its implications for aerospace and defense contractors. This budget, framed as a "Dream Military" initiative to counter "troubled and dangerous times," is not just a numbers game. It's a strategic repositioning of the U.S. defense industrial base, with clear winners and losers emerging in the near term. For investors, the question is no longer if this budget will pass, but how to position for the capital gains it will unlock.

Key Beneficiaries: Who's on the Front Lines?

The top U.S. aerospace and defense contractors with the highest Department of Defense (DoD) contract exposure in 2025-Leidos, Booz Allen Hamilton, Lockheed Martin, General Dynamics, and RTX-are poised to dominate the next phase of defense spending. Leidos, for instance, secured $11.71 billion in federal contracts in 2024, driven by its dominance in defense IT and space systems. Booz Allen Hamilton, with its AI and cybersecurity expertise, reported $10.11 billion in DoD contracts, while Lockheed Martin's $9.16 billion in federal spending was fueled by the F-35 program and hypersonic weapons.

The proposed budget explicitly prioritizes programs that align with these companies' core competencies. For example, the F-35 Lightning II program-managed by Lockheed Martin-remains a cornerstone of modernization efforts. In 2025 alone, Lockheed delivered 191 F-35 jets, a record for the program. Meanwhile, RTX (formerly Raytheon) is under pressure to accelerate production of missile defense systems and advanced radar technologies, with the Pentagon's "Golden Dome" initiative allocating $175 billion to counter hypersonic and ballistic threats.

Stock Market Reactions: Volatility and Opportunity

The market's initial reaction to Trump's budget proposal was mixed. While European defense stocks surged to record highs, U.S. defense contractors like Raytheon and Lockheed Martin saw shares dip before rebounding. This volatility reflects investor uncertainty about Trump's "Production First" mandate, which ties executive pay to performance metrics and bans stock buybacks for companies failing to meet delivery timelines. However, the long-term outlook remains bullish.

Analyst ratings for key players suggest optimism. Leidos Holdings (LDOS) has a "Moderate Buy" consensus rating, with a 12-month price target of $205.42 (4.45% upside from its current price of $196.67). RTX Corporation (RTX) also carries a "Moderate Buy" rating, though its average target price of $184.47 implies a slight downside from its current $186.45 level. Lockheed Martin (LMT), meanwhile, has seen its EPS estimates upgraded to $6.94 for Q1 2026, with a full-year projection of $27.15.

Strategic Sector Positioning: Where to Allocate Capital

For near-term capital gains, investors should focus on companies with direct exposure to the budget's high-priority programs. Lockheed Martin and RTX are clear front-runners, given their roles in the F-35 program and missile defense systems. However, Leidos and Booz Allen Hamilton offer compelling upside in the AI and cybersecurity segments, which are increasingly critical to national security.

The budget's emphasis on rapid production also favors companies with scalable manufacturing capabilities. General Dynamics, for instance, is set to benefit from its Virginia-class submarine contracts, while Northrop Grumman and Boeing are likely to see increased demand for next-generation air dominance projects like the F-47.

Risks and Mitigations

The primary risk lies in execution. Trump's threat to restrict Pentagon purchases from companies prioritizing dividends over production could create short-term headwinds. However, the budget's front-loading via the One Big Beautiful Bill Act ensures that contractors will receive steady cash flows, mitigating liquidity concerns. Additionally, the shift toward tariff-funded defense spending reduces reliance on traditional debt financing, offering a more sustainable funding model.

Conclusion: A Golden Era for Defense Investors

Trump's $1.5 trillion defense budget is more than a political statement-it's a catalyst for a new era of defense spending. For investors, the key is to align with companies that are not only contractually positioned to benefit but also aligned with the administration's "Production First" ethos. Lockheed Martin, RTX, and Leidos represent the most compelling opportunities, but the broader sector's tailwinds-driven by geopolitical tensions and technological innovation-suggest that strategic positioning now could yield outsized returns in 2027.