Defense Industry Stocks: Thriving Amid Trade Uncertainty and Rising Budgets

In a market landscape unsettled by ongoing trade discussions, the defense industry is demonstrating notable strength. While many sectors face headwinds from tariff implementations, companies involved in national security are charting a different course, buoyed by factors unique to their operational structure and potential government spending priorities.

Domestic Focus Provides Insulation

A key factor shielding defense contractors from the negative impacts of trade tariffs is their predominantly U.S.-centric operations. Unlike industries reliant on complex global supply chains, major defense firms conduct most of their manufacturing and sourcing within the United States. As Sheila Kahyaoglu, an analyst at Jefferies, noted, these companies generally “don’t produce outside the U.S., so they don’t face tariffs.”

This domestic concentration limits their exposure to international trade disputes. For instance, Tony Bancroft of Gabelli Funds highlighted that approximately 90% of Boeing’s (BA) defense business relies on domestic components. Furthermore, the United States’ dominant position in advanced defense technology makes it difficult for other nations to effectively retaliate with targeted sanctions against this specific sector.

Anticipation of Increased Defense Spending

The sector’s positive performance is also significantly driven by signals from President Donald Trump’s administration regarding future defense budgets. Gordon Haskett’s head of research, Don Bilson, pointed to discussions suggesting a potential defense budget exceeding $1 trillion by the fiscal year 2026. This represents a substantial increase of at least $100 billion over current authorized levels.

This potential influx of government spending has bolstered investor confidence. Huntington Ingalls (HII), a major shipbuilder, serves as a prime example. The company’s stock saw considerable gains, particularly after President Trump emphasized initiatives like “Make Shipbuilding Great Again,” suggesting a renewed focus and increased funding for naval capabilities. HII gained roughly 5% recently and saw a 16% surge in March following such remarks.

Sector Leaders and Analyst Outlook

While the broader S&P 500 index experienced declines, several defense stocks showcased resilience. Huntington Ingalls (HII), Lockheed Martin (LMT), and L3Harris (LHX) demonstrated relative strength. Although the iShares U.S. Aerospace & Defense ETF (ITA) experienced a downturn, its performance was still comparatively better than the overall market index during recent tariff-related selloffs.

Analysts are identifying specific opportunities within the sector:

• Kristine Liwag at Morgan Stanley favors Northrop Grumman (NOC), citing its strong alignment with enduring Department of Defense requirements as a key strength.
• Douglas Harned from Bernstein maintains a preference for L3Harris (LHX), pointing to its operational enhancements and appealing valuation. Bernstein has set a price target suggesting significant potential upside for LHX.

The combination of insulation from trade conflicts and the prospect of robust future funding positions the defense sector as a noteworthy area of stability in the current economic environment.