Why defence stocks are back in focus after Trump’s budget shock

Defence stocks snapped back into the spotlight after President Donald Trump signalled a dramatic shift in US military spending. In a social media post that caught markets off guard, Trump floated a $1.5 trillion defence budget for 2027, a sharp jump from the roughly $901 billion set for 2026. The proposal triggered a rapid after-hours rebound in major US defence names, reversing earlier losses.

Lockheed Martin surged 7%, while Northrop Grumman climbed 4%, underscoring how tightly defence valuations remain tied to political direction. With markets already uneasy about stretched tech valuations, Trump’s comments have reignited interest in defence as both a policy-driven and geopolitical trade.

What’s driving defence stocks?

The immediate catalyst was Trump’s promise to build what he described as a “Dream Military”, backed by a significantly larger defence budget. The scale of the proposed increase matters. A move towards $1.5 trillion would represent one of the largest step-ups in US military spending outside wartime, reshaping long-term revenue expectations for defence contractors.

Earlier in the session, defence shares had sold off after Trump criticised contractors for prioritising dividends and share buybacks over investment in production capacity. That rhetoric briefly raised fears of tighter oversight and limits on capital returns. The swift reversal later in the day showed that investors remain far more sensitive to spending signals than to governance concerns, particularly when multi-year contracts are at stake.

Beyond Washington, defence demand remains structurally supported. Europe continues to rearm, NATO spending targets are rising, and conflicts in Ukraine and the Middle East have reinforced the political urgency of military readiness. These forces have made defence stocks increasingly resilient to broader market volatility.

Why it matters

Defence stocks occupy a unique position in equity markets. Unlike most cyclical sectors, their revenues are directly linked to government budgets rather than consumer demand or credit conditions. When spending expectations rise, earnings visibility improves almost instantly, even if actual contracts take years to materialise.

Analysts argue this is why defence stocks now trade more like political assets than industrial ones. “Markets are pricing defence on policy momentum, not balance sheets,” a US defence strategist told Reuters. “Once spending direction is clear, the sector reprices very quickly”.

For investors, that dynamic increases both opportunity and risk. Sudden changes in rhetoric can trigger sharp moves in either direction, making timing and positioning more important than traditional valuation models.

Impact on markets and sector rotation

The renewed interest in defence comes as signs of fatigue emerge in the semiconductor and AI-led rally that dominated early 2026. Chipmakers drove gains at the start of the year, but concerns over valuation and profit sustainability have prompted a gradual rotation. Defence stocks are now absorbing some of that capital, supported by clearer fiscal tailwinds.

Performance data reflects the shift. Lockheed Martin is up nearly 8% year to date, while Halliburton has gained 12%, benefiting from both defence and energy-linked demand. 

In Europe, defence heavyweights such as BAE Systems and Rheinmetall have posted strong gains, driven by persistent geopolitical headlines.

Options markets suggest investors expect larger swings ahead. Implied volatility across defence names has risen, echoing patterns seen in early 2022 when geopolitical escalation sent European defence stocks sharply higher. Rheinmetall’s 30% surge in a single week following the Ukraine invasion remains a clear historical parallel for how quickly the sector can reprice.

Expert outlook

Looking ahead, defence stocks face a familiar mix of optimism and uncertainty. Trump’s proposal still requires political backing, and budget negotiations could dilute the headline figure. However, even a partial increase would mark a meaningful shift in spending priorities relative to recent years.

Strategists expect defence to remain a headline-driven trade in the near term. Some favour options-based strategies to manage rising volatility, while others see value in pairing defence exposure against shorts in overextended tech sectors. The common thread is caution around chasing rallies without policy confirmation.

Key signals to watch include Congressional responses, NATO spending updates, and any clarity on how tariff revenues might be used to fund defence expansion. Until those questions are answered, defence stocks are likely to remain sensitive to every policy headline.

Key takeaway

Defence stocks are back in focus as Trump’s budget proposal reshapes market expectations around military spending. The rapid rebound highlights how tightly the sector is tied to political direction rather than short-term earnings. With signs of rotation away from AI, defence could remain a dominant theme in 2026. Investors should monitor budget negotiations and geopolitical developments for confirmation.

Lockheed Martin technical outlook

Lockheed Martin has surged sharply from the $480 support zone, briefly testing the $540 resistance before encountering aggressive profit-taking. The move highlights strong upside momentum, but the swift rejection near resistance suggests the rally may be entering a digestion phase rather than extending immediately. Momentum indicators reflect this balance: the RSI has risen rapidly toward overbought territory, signalling strong bullish participation but also increasing the risk of near-term consolidation. 

Structurally, holding above $480 maintains the broader bullish bias, with deeper downside risk only emerging below $440. A sustained break above $540 would be needed to confirm trend continuation, while consolidation near current levels would be consistent with the market absorbing recent gains.