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CompaniesAl Root
, Barrons
3 min
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20 Feb 2025, 09:07 PM
ISTUS President Donald Trump’s defense budget cuts could amount to 8% a year for five years.
Uncertainty over cuts to military spending have hammered key contractors in recent weeks. The worst-feared scenario doesn’t seem to be happening, though.
President Donald Trump’s priorities for military spending are taking shape, but investors still don’t seem to know what that means for overall military spending—or defense stocks. For now, investors are taking a sell-first-ask-questions-later approach to the sector.
Shares of highflying data-analytics firm and military contractor Palantir Technologies dove Wednesday even though projected defense cuts seem to have a limited impact on the company. Wednesday, The Washington Post reported that the Trump White House warned the Defense Department of budget cuts, citing a memo. Cuts could amount to 8% a year for five years.
After that story, Deputy Secretary of Defense Robert Salesses appeared to clarify intentions, pointing out in a news release that the president has asked for $50 billion in cuts, roughly 8% of the fiscal year 2026 budget.
What’s more, cuts would help fund the president’s priorities, including border security and drones. “President Trump’s charge to the Department is clear: to achieve peace through strength,” said Salesses. “We will do this by putting forward budgets that revive the warrior ethos, rebuild our military, and re-establish deterrence.”
A $50 billion reallocation would be a “nothing burger” for the defense sector, wrote Vertical Research Partners analyst Rob Stallard in a Thursday report. Still, it’s easy to see why investors are nervous. Cuts of that size are alarming. Total military spending over the past 12 months amounts to some $900 billion, according to Treasury Department data.
At the end of five years of 8% cuts, that number would be closer to $600 billion. That’s roughly what the U.S. spent on defense in 2017. That year, Lockheed Martin generated sales of about $51 billion. Shares closed the year at about $330, and traded for about 24 times estimated earnings expected over the coming 12 months.
Today, Lockheed shares are at about $433, and the company is expected to generate 2025 sales of about $74 billion, up about 45% from 2017. Shares valuation is about 16 times estimated earnings. Investors’ nerves have meant lower valuation multiples. Shares of Lockheed, Northrop Grumman, General Dynamics, and L3Harris Technologies, trade for about 16 times estimated 2025 earnings on average, down from about 18 times before the Nov. 5 presidential election.
Coming into Thursday trading, the four stocks were down almost 20% since the election. It’s been rough flying recently even for drone makers. Coming into Thursday trading, shares of unmanned technology provider Kratos Defense &
