Defense stocks went on a wild ride over the past 24 hours, first plunging on threats from President Trump to block dividends and share buybacks, then surging on his call for a record $1.5 trillion military budget in 2027. The whiplash illustrates a new reality for the sector: unprecedented spending is coming, but the rules of engagement between Washington and its weapons makers are being rewritten in real time.
The Carrot And The Stick
Trump delivered both in quick succession. On Wednesday, he threatened to cut off Pentagon purchases from Raytheon (now part of RTX) if the company didn’t end stock buybacks and invest more in manufacturing capacity. He criticized defense contractors for issuing “massive Dividends to their Shareholders and massive Stock Buybacks, at the expense and detriment of investing in Plants and Equipment.”
The market reaction was immediate. Lockheed Martin dropped 5.5%. Northrop Grumman fell 5%. RTX slipped 2.5%. The five major defense primes all ended Wednesday in the red.
Then came the pivot. Late Wednesday, Trump posted on Truth Social that the 2027 military budget “should not be $1 Trillion Dollars, but rather $1.5 Trillion Dollars.” For context, Congress authorized $901 billion for 2026. A 66% increase in a single year would represent one of the largest peacetime defense spending surges in American history.
“This will allow us to build the ‘Dream Military’ that we have long been entitled to, and, more importantly, that will keep us SAFE and SECURE, regardless of foe,” Trump wrote.
The Rebound
Defense stocks reversed hard. In Thursday’s trading, Northrop Grumman jumped more than 8% in early action. Lockheed Martin rose nearly 8%. RTX gained more than 4%. General Dynamics advanced 4.6%. Kratos Defense, the smaller contractor focused on drones and missile systems, surged more than 12%.
The rally wasn’t confined to American companies. BAE Systems, Britain’s largest defense firm, climbed as much as 7% before settling around 5.5% higher. Italy’s Leonardo, Sweden’s SAAB, and Germany’s Rheinmetall and Renk all gained between 1.5% and 2.7%. Even Asian defense names caught a bid, with Japan’s Mitsubishi Heavy rising 2.4%.
Electric aircraft makers with defense contracts also caught the tailwind. Archer Aviation and Joby Aviation saw significant call option activity on Thursday morning, with traders betting that increased military spending will accelerate orders for vertical takeoff aircraft.
The Fine Print Problem
J.P. Morgan analysts offered a measured take: “The administration would need to pass any major boost before the midterms and with plenty of last year’s reconciliation money still to be awarded, additional funding would prolong growth rather than drive a massive near-term spike in sales.”
Translation: a $1.5 trillion budget is a headline, not a contract. Congressional authorization remains a significant hurdle, even with Republicans holding slim majorities in both chambers. Defense appropriations historically involve extensive negotiation, and the fiscal math of such a dramatic increase would require either massive deficit spending or substantial cuts elsewhere.
Trump attributed the ability to afford the increase to his tariff policies, though the direct connection between import duties and military spending remains unclear.
The Buyback Question
Trump’s threat to restrict shareholder returns wasn’t idle rhetoric. He has complained repeatedly that defense companies are “woefully behind on deliveries of critical weaponry” while continuing to return capital to investors through dividends and buybacks. He suggested no executive should be allowed to earn more than $5 million.
The issue of buybacks in the defense sector has simmered for months. According to Reuters, share buybacks are common among defense firms, and several pay substantial dividends. Lockheed raised its dividend for the 23rd consecutive year in October 2025, to $3.45 per share.
From the industry’s perspective, returning capital to shareholders is standard corporate practice and reflects confidence in future cash flows. From Trump’s perspective, those billions should be flowing into new production facilities instead. Whether that tension resolves through executive orders, legislative action, or informal arm-twisting remains to be seen.
Geopolitics As The Driver
“Geopolitics is the inescapable story of 2026 thus far,” said Neil Wilson, UK investor strategist at Saxo Bank. “Clearly defence stocks are the play, along with rare earths.”
The defense sector rally extends a trend that began with Russia’s 2022 invasion of Ukraine. European defense indices gained roughly 57% in 2025, and the sector started 2026 with fresh momentum driven by U.S. military action in Venezuela and Trump’s comments about acquiring Greenland.
For investors, the calculus is straightforward: global instability drives defense spending, and Trump appears committed to ramping up military budgets regardless of the fiscal implications. The question is whether the administration’s demands for domestic manufacturing investment will crimp margins enough to offset the revenue benefits of larger budgets.
What It Means For Markets
The broader market showed mixed signals on Thursday. The Dow gained roughly 0.6%, buoyed in part by defense names. The Nasdaq dropped about 0.7% as traders rotated out of tech. The S&P 500 hovered near flat, with information technology the only sector posting major losses.
Nvidia, Apple, and Meta all traded lower as some investors question whether the AI trade has run too far, too fast. The rotation into defense represents a bet that geopolitical uncertainty will remain elevated and that traditional defense contractors will benefit from Washington’s willingness to spend.
For now, the market appears to be taking Trump’s $1.5 trillion proposal seriously, even if the path from Truth Social post to appropriations bill remains long and uncertain. The defense sector just received the clearest signal yet that this administration intends to spend big on military hardware. The only question is whether the companies building that hardware will be allowed to reward their shareholders along the way.
