Global defense stocks advance after Trump calls for larger US military budget

Global defense stocks advance after Trump calls for larger US military budget
Global defense stocks advance after Trump calls for larger US military budget

By Shashwat Chauhan and Anna Pruchnicka

Jan 8 (Reuters) – Global defense stocks rose on Thursday after President Donald Trump called for a substantial increase in the U.S. military budget, fueling a fresh rally amid ongoing geopolitical tensions.

U.S. defense companies rebounded after falling on Wednesday following Trump’s threat to prevent U.S. contractors like RTX from paying dividends or buying back shares until they ramp up weapons production.

Trump said Wednesday that the US military budget for 2027 should be $1.5 trillion, significantly higher than the $901 billion approved for this year.

“The administration would need to approve any major boost before the midterm elections, and with plenty of last year’s reconciliation money still to be awarded, additional funding would prolong growth rather than fuel a massive increase in near-term sales,” JP Morgan analysts said in a note.

While congressional authorization for such an increase could pose a challenge, Trump’s Republicans, who hold slim majorities in both the Senate and House of Representatives, have shown little interest in opposing the president’s spending plans.

US defense companies Northrop Grumman and Lockheed Martin rose about 7% each in pre-market trading. Both stocks fell about 5% on Wednesday.

RTX rose 4.6% and L3Harris Technologies added 6.2%, while General Dynamics rose 5.5% in light trading.

Smaller defense companies Kratos Defense and AeroVironment rose 8.8% and 7.7%, respectively.

European defense companies, however, began to lose steam after rising earlier in the session. The index of aerospace and defense companies was last up 1.1%, having risen as much as 2.1% to hit a record high.

The index has rebounded sharply since Russia’s large-scale invasion of Ukraine in 2022, boosted by the prospect of higher defense spending in Europe.

Despite a pullback since October, it gained about 57% last year and entered 2026 on a solid footing as sentiment was boosted by US military action in Venezuela and Trump’s comments on Greenland.

“Geopolitics is the unavoidable story of 2026 so far,” said Neil Wilson, UK investor strategist at Saxo Bank.

“It is clear that defense actions are the bet, along with rare earths.”

BAE Systems, Britain’s largest defense company, was last up 5.5% after rising almost 7% earlier, while Italy’s Leonardo, Sweden’s SAAB, Germany’s Rheinmetall and Renk rose between 1.5% and 2.7%.

THREAT REGARDING DIVIDENDS AND BUYBACKS

Share buybacks are common among defense companies and several pay dividends. Lockheed, for example, raised its dividend for the 23rd consecutive year in October, to $3.45 per share. It also authorized the purchase of up to $2 billion of its shares, bringing the total amount pledged for buybacks to $9.1 billion.

Separately, Trump also wrote in a Truth Social post on Wednesday: “The War Department informed me that the defense contractor, Raytheon, has been the least responsive to the War Department’s needs.” Raytheon is an RTX unit.

Analysts at Morgan Stanley estimate that dividend yields for Northrop Grumman, Lockheed Martin, L3Harris, General Dynamics and RTX averaged about 1.9% and these companies bought back about 1.8% of their respective market capitalizations.

“A cap on return on equity is a negative increase, but the size is manageable,” Morgan Stanley analysts led by Kristine Liwag said in the note.

The average dividend yield of S&P 500 companies stood at 1.37%, according to data compiled by ⁠LSEG.

Trump’s order has significant implications for U.S. defense contractors that may encourage a rotation toward U.K. defense companies, Investec analyst Ben Bourne said in an emailed comment.

BAE Systems, Chemring and Avon Technologies have the largest exposure in the United States, Bourne added, noting that Cohort, Babcock and Qinetiq could also benefit.

(Reporting by Anna Pruchnicka and Shashwat Chauhan; Editing by Alun John and Sriraj Kalluvila)

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