Trump's Expanded Military Authority and the Reshaping of Defense Investments: Navigating Political Risk in 2025

The 2025–2026 U.S. defense landscape, shaped by President Donald Trump's aggressive policy agenda, presents a complex interplay of political risk, executive authority, and market transformation. At the heart of this dynamic lies Trump's push to expand military authority for domestic deployments and his recalibration of defense spending priorities. These moves, while framed as enhancing national security, raise critical questions about long-term fiscal sustainability, legal boundaries, and the structural evolution of the defense industrial base.

Budgetary Shifts: A "Big Beautiful" One-Time Boost or a Hollowed-Out Force?

Trump's 2026 defense budget of $848.3 billion initially appears modest, representing a $1.5 billion reduction from Biden's 2025 request. Adjusted for inflation, this equates to a $25.4 billion loss in real terms, exacerbating concerns about underfunding for the Air Force and Space Force, both of which face aging fleets and readiness gaps, according to a Forbes analysis. However, the one-time $156.2 billion supplement from the Big Beautiful Bill Act-which includes $12.8 billion for the "Golden Dome" missile defense initiative and $1 billion for border security-pushes total spending past $1 trillion, according to an AP News story.

Critics argue this surge is temporary, as the supplemental funds are not integrated into the base budget and are slated to expire by 2029, according to a CFR briefing. This creates a "boom and bust" cycle, where critical modernization programs-such as replacing 50-year-old aircraft or accelerating hypersonic missile development-risk stalling once the one-time funding evaporates. For investors, this volatility underscores the need to differentiate between short-term beneficiaries (e.g., companies securing contracts for AI-driven logistics or directed energy systems) and long-term structural winners (e.g., firms with recurring revenue from sustainment and readiness programs).

Executive Overreach and Legal Risks: A Double-Edged Sword

Trump's expansion of National Guard authority to address domestic issues-such as deploying troops to cities like Los Angeles and Chicago-has sparked legal battles over the Posse Comitatus Act, which restricts the military's role in law enforcement, as noted in that Forbes analysis. While the administration justifies these moves as necessary for "restoring order," opponents warn of authoritarian overreach and the militarization of civilian spaces.

This legal uncertainty introduces political risk for defense contractors. For instance, companies supplying equipment for domestic operations (e.g., surveillance drones or non-lethal weapons) could face reputational damage or regulatory pushback if deployments are deemed unconstitutional. Conversely, firms involved in border security-such as Raytheon's "Iron Dome" analogs or Palantir's AI-driven analytics-stand to gain from sustained demand, even as critics highlight the trade-off between security and civil liberties, per a Breaking Defense preview.

Market Reactions: Startups vs. Legacy Primes

The defense sector is witnessing a seismic shift in favor of low-cost, autonomous systems, a trend accelerated by Trump's preference for "disruptive innovation." Startups like Anduril and Epirus, which specialize in counter-drone systems and AI-powered battlefield software, have secured major contracts through the Defense Innovation Unit (DIU), as reported in the Breaking Defense preview. Meanwhile, legacy primes like Lockheed Martin and Northrop Grumman face pressure to pivot from traditional platforms (e.g., F-35s) to hybrid solutions that integrate uncrewed systems and digital twins.

Venture capital investments in defense tech have surged to $28 billion in 2025, doubling from the previous year, as private equity firms and tech giants bet on scalable solutions, according to a Finviz report. This influx of capital is reshaping the industrial base, with smaller firms gaining traction in niche areas like quantum computing and passive radar. However, the reliance on Trump's deregulatory agenda and a more permissive M&A environment introduces execution risk-if the administration falters on promised reforms, consolidation could stall, leaving startups vulnerable to cash flow constraints.

Global Implications: Europe's Rise and the U.S. "Lead From Behind" Strategy

Trump's pressure on NATO allies to increase defense spending has catalyzed a European arms renaissance. Germany's €800 billion "ReArm Europe" plan and Australia's $270 billion defense modernization drive are diverting capital from U.S. primes to local contractors like Rheinmetall and Naval Group, according to a Stocks Down Under analysis. While this diversification reduces dependency on American systems, it also creates opportunities for U.S. firms to export dual-use technologies (e.g., AI platforms or cyber defense tools) that enhance interoperability.

For investors, the key is to monitor how European defense spending translates into stock performance. European defense firms are already outpacing their U.S. counterparts in revenue growth, but scaling production remains a challenge due to underdeveloped supply chains. Conversely, U.S. firms with strong footholds in NATO-aligned markets-such as Boeing's partnerships in Poland or Raytheon's work with the UK-could benefit from cross-border collaboration.

Conclusion: Balancing Opportunity and Risk in a Polarized Era

Trump's defense policies are a double-edged sword: they inject short-term capital into the sector while testing the limits of executive power and fiscal discipline. For investors, the path forward requires a nuanced approach:
1. Prioritize resilience: Favor companies with diversified revenue streams (e.g., Palantir's commercial AI contracts alongside defense work) to mitigate political volatility.
2. Monitor legal and regulatory shifts: Track litigation over National Guard deployments and potential congressional pushback against supplemental spending.
3. Embrace innovation: Allocate capital to firms at the forefront of AI, autonomy, and space architecture, which are central to Trump's modernization agenda.

As the 2026 budget cycle unfolds, the defense sector's ability to adapt to Trump's vision will hinge on its capacity to balance innovation with fiscal prudence-and to navigate the thin line between strategic necessity and executive overreach.