Al Root

The President has laid out his spending priorities for fiscal year 2027. He wants a giant increase in defense spending.

That is a tailwind for defense stocks, although investors have to believe it will happen.

On Friday, President Trump unveiled the budget, which includes $1.5 trillion for defense, building "upon the historic $1 trillion" request for fiscal year 2026.

The $1.5 trillion number would be up 42% from total fiscal year 2026 budgetary resources. It's a historic increase, not seen since the Korean War. The budget request looks to be in addition to the $200 billion in additional funding the Pentagon is seeking to execute the Iran war this year.

There are some details to note. "Of this amount, the Budget includes $1.1 trillion in base discretionary budget authority specifically for DoW in 2027," reads part of the release. "The Budget also includes a request for $350 billion in additional mandatory resources through reconciliation for critical Administration priorities such as increasing access to critical munitions and further expansion of the defense industrial base."

Reconciliation bills are filibuster-proof, needing only 51 votes to pass.

The money, especially the $350 billion for munitions -- think missile stockpiling -- should be a boon to the defense sector. It is, though those amounts were largely expected and may already be reflected in stock prices. What's more, the final amounts to be spent are up to Congress. This is the first step in a negotiation.

Through Thursday trading, the iShares Aerospace & Defense ETF was down about 9% since the start of fighting in Iran. That seems counterintuitive. But the stock market is forward-looking, and military actions today could lead to fewer actions tomorrow. What's more, investors might be worried that current spending is unsustainable.

The budget request shows that higher spending is likely, which has helped sector shares. Through Thursday, the iShares ETF was up 35% over the past year and 71% over the past two years.

Much of the new spending will go toward more missiles, autonomous battle systems, and counter-drone technology. That benefits some smaller-cap drone technology companies.

Take Kratos Defense & Security Solutions, which makes Gremlin and Valkyrie drones, among others. Through Thursday trading, its stock was up 121% over the past year and 272% over the past two years. Those gains have left the shares trading at about 87 times estimated 2026 earnings, according to FactSet.

Valuations for the entire sector are elevated. Shares of General Dynamics, RTX, Lockheed Martin, Northrop Grumman, and L3Harris Technologies trade for an average of about 25 times estimated 2026 earnings, a 22% premium to the S&P 500. Two years ago, the group traded for 18 times earnings, a 16% discount to the S&P 500.

Write to Al Root at allen.root@dowjones.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

April 03, 2026 11:34 ET (15:34 GMT)

Copyright (c) 2026 Dow Jones & Company, Inc.