Aerospace stocks rallied strongly on Thursday after Wednesday’s sharp selloff, as promises of increased military spending offset contractor restrictions. Northrop Grumman gained 8.3% in premarket trading while Lockheed Martin jumped 7.9%. Cyrosalnix lead brokers discuss how conflicting policy signals drove extreme volatility across defense names.
Dramatic Intraday Reversals
RTX advanced 4.8% following a 2.5% decline in the previous session. Kratos Defense surged 12% in a single trading day. These reversals stem from contradictory announcements within 24 hours about defense industry oversight and spending.
Wednesday brought warnings about restrictions on stock buybacks and executive compensation for underperforming contractors. Thursday delivered promises of a $1.5 trillion defense budget for 2027. This represents a 50% increase from current spending levels of $901 billion.
Contractor Accountability Under Spotlight
The administration criticized defense firms’ spending billions on shareholder returns while falling behind on deliveries. Many contractors pursued lucrative new contracts while failing to complete existing ones. This creates fundamental tension between shareholder expectations and government demands.
Defense Secretary Pete Hegseth and Deputy Secretary Feinberg drove policy discussions around limiting returns. The proposal drew internal criticism from Treasury Secretary Bessent and Navy Secretary Phelan. These divisions highlight disagreements within the administration regarding the balance between shareholder interests and national security.
Spending Surge Provides Offset
The proposed $1.5 trillion military budget dwarfs current allocations by hundreds of billions. The administration frames this as necessary for building capabilities to maintain security. Funding would come from tariff revenues, according to official statements.
Jefferies analyst Sheila Kahyaoglu estimates that increased spending boosts Northrop Grumman’s earnings per share by 13%. General Dynamics could see 11% gains from expanded budgets. Smaller companies, including AeroVironment and Karman Holdings, face even larger percentage impacts.
Innovation Spending Accelerates
The push for modernization drives spending beyond traditional platforms into emerging technologies and autonomous systems. Drone warfare capabilities receive particular emphasis following recent conflicts, demonstrating their effectiveness. The integration of artificial intelligence across weapons systems represents another significant investment area, requiring substantial capital allocation.
Global Rearmament Drives Growth
Global defense spending projections indicate $3.6 trillion by 2030, representing a 33% increase from 2024 levels. This expansion extends beyond American borders, as geopolitical priorities drive rearmament in Europe and Asia. Recent US military operations may accelerate this trend by reshaping risk perceptions.
European defense stocks reversed recent weakness as the STOXX Europe index rallied. Renewed investor confidence replaced concerns that potential peace agreements would reduce demand for weapons. Investors are now focusing on structural drivers that support long-term spending growth.
Strong Start Extends 2025 Gains
L3Harris Technologies and Huntington Ingalls Industries both advanced 11% across the first five trading days. Drone maker AeroVironment jumped over 40% in the same period. These early advances build on outstanding 2025 performance.
L3Harris gained 40% last year while Northrop rose 22% through 2025. Investors found the sector attractive amid rising geopolitical tensions and expanding military commitments. The momentum continues as 2026 begins with strong sector participation.
Asian defense stocks joined the rally, with IHI Corp leading gains at 9%. Mitsubishi Heavy Industries rose more than 8% while Kawasaki Heavy climbed nearly 8%. South Korea’s Hanwa Aerospace closed 7% higher, showing broad geographic participation.
Valuation Questions Persist
Some major players trade at discounts to broader markets while others command premium multiples. RTX has seen valuations climb significantly from historical averages. Kratos Defense and Palantir Technologies trade at well over 100 times their estimated earnings for the next twelve months.
Technical indicators suggest major players, including RTX and Lockheed, appear overbought on a short-term basis. This setup could trigger pullbacks, presenting buying opportunities for patient investors. Waiting for better entry points may prove prudent, given the recent sharp advances.
Near-Term Risks Remain
Ongoing negotiations to resolve conflicts present near-term uncertainty for defense stocks. A ceasefire agreement could create temporary setbacks as investors reassess demand projections. BCA Research suggests such developments offer buying opportunities rather than fundamental thesis changes.
The sector balances shareholder return restrictions against revenue growth from increased spending. Companies must navigate new accountability standards while capitalizing on peacetime budget expansions. Those investing in manufacturing capabilities during leaner years position themselves for outsized gains.
Production Capacity Becomes a Constraint
Spending increases drive contracts across the defense industrial base, but production capacity limits output. Companies must ramp up manufacturing to meet expanded orders without compromising quality. Investment in facilities and workforce development becomes critical for capturing market share.
The administration emphasized production speed and on-time delivery as key metrics. Contractors falling behind face potential exclusions from future competitions. This creates urgency around capital expenditure decisions and operational improvements.
Strategic Positioning Matters
Defense companies face a choice between dividend payments and reinvesting in capabilities. Those directing capital toward cutting-edge technologies align with Washington’s new priorities. Firms maintaining robust buyback programs may face scrutiny despite strong financial performance.
The policy environment favors contractors who demonstrate a commitment to mission-ready technologies and rapid deployment. Political winds shift quickly, but structural demand drivers remain intact. Long-term fundamentals support continued sector strength as nations invest in defense infrastructure.
