Furious Rally in US Defense Stocks Faces Earnings Reality Check

(Bloomberg) — An increasingly unstable global geopolitical order has turbocharged stocks of military contractors in recent months. Now, with some of the biggest names in the industry set to report earnings this week, investors are eager for evidence that the rally is rooted in reality.

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An index of aerospace and defense shares notched a 42% gain last year, more than double the returns of the technology-heavy Nasdaq 100 Index (^NDX), amid expectations for heavier government spending on fighter jets and missiles, as well as newer military technology like drones and sophisticated software.

The sudden US ouster this month of Venezuelan President Nicolas Maduro and President Donald Trump’s threats about taking over Greenland have further intensified the rush to own defense stocks, propelling valuations to levels typically reserved for high-flying tech names.

If, as analysts and industry bulls argue, the surge in defense spending is only getting started, those soaring multiples are justified. Investors will get a key read on this in the days ahead as firms including Lockheed Martin Corp. (LMT), L3Harris Technologies Inc. (LHX), Northrop Grumman Corp. (NOC) and RTX Corp. (RTX) report their quarterly earnings and provide their outlook for the year ahead.

“I don’t think that the valuations are out of line in the defense sector,” said Tom Hulick, chief executive officer of Strategy Asset Managers, which owns Lockheed Martin (LMT) and General Dynamics (GD), as well as the State Street SPDR S&P Aerospace & Defense ETF. “These are companies that are critical to the current business cycle” in defense manufacturing, he said.

Historically, stocks in the sector have been seen as classic “defensive” bets, meaning investors prefer them during times of uncertainty and ignore during bull runs. Events over the past year, though, led a change in that thinking, with Trump vowing to beef up US defense capabilities even as he upended decades of diplomacy by backing away from traditional US allies, prompting a scramble in Europe to rearm.

Meanwhile, the continuing conflict between Russia and Ukraine has highlighted how physical warfare has changed, with greater use of technologies like drones.

Together, these factors have led to a shift of market valuations as defense companies integrate cutting-edge technologies, including advanced software, sensors, artificial intelligence and sophisticated missile defense systems into their core structures. Investors have latched on to the trend, with some calling it a “new dawn” for the sector.

To be sure, Trump’s focus on military strength has cut both ways. Earlier this month, defense stocks tumbled sharply after Trump announced via his social-media platform that he would move to curb dividends and buybacks in the sector, only to surge the next day after the president floated a plan to boost defense spending to $1.5 trillion in 2027.

With the group likely to remain in the headlines as well as the “political cross-hairs” for the time being, RBC Capital Markets analyst Ken Herbert warned that volatility will also likely remain high.

Some investors worry that demand won’t live up to the high expectations set by the charged narrative that is sending these stocks surging.

The Golden Dome program, for example, is an ambitious project that aims to create a missile defense initiative, and is often cited by bullish investors and analysts as a big opportunity for military contractors. Yet it is a technology that does not currently exist, and experts say the timeline laid out by the administration seems “unrealistic.”

The proposal for a $500 billion jump in 2027 defense spending also seems unlikely to happen in its entirety, analysts have said, pointing out that any such funding boost will need approval from Congress. Even the fast-changing developments around Greenland — from a possible US invasion to a tentative “framework” agreement — show there are few concrete details around which companies can reliably plan their strategies.

That said, most analysts agree that overall trends and the geopolitical backdrop are supportive for the industry. Meanwhile, even as valuations across the sector have climbed, some still offer a discount to the broader market. Lockheed and General Dynamics trade at 20 and 21 times projected profits in the next 12 months, respectively, a lower valuation than the S&P 500 Index. RTX and L3Harris command a valuation multiple a little under 30 times earnings.

“Even though defense names are trading elevated relative to their own history, they do trade at discounts to the market,” Jefferies analyst Sheila Kahyaoglu said.

Kahyaoglu expects revenue for the group to grow at about 5% in 2026. She noted that current valuations reflect only mid-single-digit growth in the US defense budget. A $1.5 trillion budget could add roughly $5.6 billion to prime contractors’ revenue, offsetting limited share repurchases.

Relative to that potential upside, “there is opportunity,” she said.