U.S. defense stocks on the rise: why is an analyst urging caution?

Shares of U.S. defense companies showed the best performance in the market at the beginning of the trading session on January 8, Bloomberg writes. While the S&P 500 went into a small minus, Nasdaq 100 declined by 1%, interrupting a three-day growth, shares of U.S. defense companies: Lockheed Martin and Kratos Defense & Security Solutions - on the contrary, grew by more than 6% and 15%, respectively.

Also at the opening of the U.S. market on January 8, significant growth was shown by securities of U.S. military-industrial companies L3Harris Technologies (+6.4%), RTX (+2.18%), Northrop Grumman (+4.78%), General Dynamics (+4.03%) and shares of drone manufacturer AeroVironment (+8.42%). All of them demonstrated such dynamics after the statements made a day earlier by U.S. President Donald Trump about plans to increase U.S. defense spending in 2027 by 50% - up to $1.5 trillion.

The last time the U.S. defense budget was increased by 50% was in 1951 because of the Korean War, noted Capital Alpha Partners analyst Byron Callan, Barrons writes. "It is unclear to us whether defense contractors will be able to cover the magnitude of this increase, even if it is spread over fiscal years 2027-2030," he added.

In addition, agreeing on a $1.5 trillion defense budget would require 60 votes in the U.S. Senate to pass, Barrons notes. Trump indicated in his post that the increase in defense spending would come from tariffs. Tariff revenues are expected to total about $400 billion in 2026, the publication notes. The implication is that these funds - and more - will be spent on defense, Barrons writes, stressing that all of this will be the subject of discussion among U.S. politicians in a midterm election year; whether they will be able to agree among themselves on this issue remains to be seen.

The securities of American defense companies showed significant growth the day after all of them, on the contrary, went negative on January 7. The reason was again Trump's words that he would not tolerate defense contractors paying dividends or conducting share buybacks. The industry, the U.S. president noted, is too slow in delivering equipment to the military while paying "huge" dividends to shareholders.

Against this backdrop, shares of major U.S. defense companies - including Lockheed Martin (-4.8%), Northrop Grumman (-5.5%) and General Dynamics (-4.2%) - fell sharply at the close, but more than recouped the decline on Thursday, January 8.

This article was AI-translated and verified by a human editor