Trump's $1.5T Pentagon Budget: Defense Sector Implications and Investment Opportunities

The U.S. defense sector is poised for a seismic shift as President Donald Trump's proposed $1.5 trillion Pentagon budget for 2027 gains momentum, a 66% jump from the 2026 defense budget of $901 billion. This ambitious plan, funded by increased tariffs and framed as essential for building a "Dream Military," signals a dramatic reorientation of national security priorities. For investors, the implications are clear: defense contractors are set to benefit from a surge in spending on modernization, missile defense, and space capabilities. However, the budget also introduces new scrutiny of corporate practices, with Trump explicitly criticizing excessive dividends and stock buybacks. This analysis explores how the proposed budget reshapes the defense landscape, identifies key beneficiaries, and evaluates stock valuations in light of these developments.

Key Budget Priorities and Contractor Allocations

The FY2026 defense budget, which serves as a precursor to the 2027 plan, already reflects a 13.4% increase to $1.01 trillion, with allocations emphasizing nuclear modernization ($60 billion), the Golden Dome missile defense initiative ($25 billion), and Space Force development ($40 billion). These priorities are expected to expand under the 2027 budget, with the Golden Dome project alone projected to absorb $151 billion through the SHIELD (Scalable Homeland Innovative Enterprise Layered Defense) contract. Over 2,100 companies-including industry giants like Lockheed Martin, Northrop Grumman, and Raytheon-have been selected for this initiative, which spans 19 technical domains from AI-driven threat detection to space-based interceptors.

Nuclear modernization remains another cornerstone, with the Air Force awarding $850 million for infrastructure to support the B-21 Raider and Sentinel ICBM programs. Northrop Grumman, as the prime contractor for the B-21, and Boeing, which leads the Sentinel ICBM effort, are central to this push. Meanwhile, the Space Force's pursuit of space-based kinetic interceptors and midcourse missile defense systems has created opportunities for firms like Kratos Defense and emerging tech startups.

Financial Performance and Valuation Metrics

The defense sector's financial health has been robust in 2025–2026, with elevated valuations and strong earnings growth. The U.S. Aerospace & Defense industry trades at a forward P/E ratio of 44.5x, well above its 3-year average of 32.1x, reflecting investor confidence in long-term demand. Major contractors have outperformed expectations:

• Lockheed Martin reported Q3 2025 earnings of $6.95 per share, exceeding estimates, and raised its full-year guidance to $22.15–$22.35 per share. Its forward P/E ratio stands at 21.9x, with a 2.8% dividend yield.
• Northrop Grumman delivered $7.67 per share in Q3 2025, a 14% year-over-year increase in defense systems sales, and trades at a forward P/E of 22.9x.
• Raytheon Technologies (RTX) reported a $251 billion backlog, including $103 billion in defense orders, and raised 2025 guidance to $6.10–$6.20 per share. Its forward P/E of 28.9x reflects premium valuations.
• Boeing faces challenges but is securing growth through international contracts, such as a $2.7 billion PAC-3 missile seeker deal, with analysts projecting a 13.7% upside.

These metrics underscore the sector's resilience, though valuations vary. RTX's elevated P/E ratio, for instance, suggests higher growth expectations, while Boeing's lack of a forward P/E indicates lingering operational risks.

Strategic Positioning and Risks

The 2027 budget's emphasis on industrial base revitalization and procurement reforms-such as multiyear contracts and streamlined FAR (Federal Acquisition Regulation) processes- favors contractors with scalable manufacturing and R&D capabilities. Lockheed Martin and Northrop Grumman, with their entrenched roles in nuclear and space programs, are well-positioned. Smaller firms like Kratos and Palantir, which partner with Boeing on data analytics, also stand to gain from the shift toward AI and digital transformation.

However, Trump's directive to curb stock buybacks and dividends introduces a new dynamic. Raytheon, for example, faced direct criticism from the president for prioritizing shareholder returns over reinvestment. Investors must weigh whether contractors will reallocate capital to R&D and production or face regulatory pushback.

Investment Opportunities

For investors, the defense sector offers a mix of defensive and growth opportunities. Established primes like Lockheed and Northrop provide stable cash flows and alignment with core modernization programs. High-growth plays, such as Kratos and Anduril Industries, which specialize in AI and autonomous systems, could outperform if the Golden Dome initiative meets its $151 billion target. Additionally, ETFs like the Global X Defense Tech ETF, which surged 74% in 2025, offer diversified exposure to a sector poised for sustained demand.

Conclusion

Trump's $1.5 trillion Pentagon budget represents a paradigm shift for the U.S. defense sector, prioritizing technological superiority and industrial capacity. While valuations vary, the sector's strong earnings growth and alignment with strategic priorities make it an attractive long-term investment. Investors should focus on contractors with diversified portfolios, robust backlogs, and adaptability to regulatory changes. As the 2027 budget moves closer to reality, the defense sector's ability to balance innovation with fiscal discipline will determine its success-and profitability.