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 & Security Solutions were up about 16% since the election. Impressive. Still, the stock was down more than 17% over the past two weeks.
Recent news seems to have even hit Palantir stock, which provides software and artificial-intelligence solutions to the Defense Department. Shares dropped 10.1% on Wednesday. Wedbush analyst Dan Ives believes that was an overreaction. Less spending on traditional defense tech will lead to more spending on AI-enabled solutions, he wrote Thursday.
“The bears which have hated Palantir from $12 to $120 in the last 18 months now have found their latest silver-bullet negative thesis around…budget cuts,” added Ives. “These DOD cuts…will enable the company to gain more IT budget dollars at the Pentagon, not less.”
He rates Palantir stock at Buy with a $120 price target. It’s been tough for investors to gauge the sector lately, and that probably won’t change for a few months. Investors will have to be ready when the spending outlook is less hazy. Shares of Lockheed, L3Harris, Northrop, and General Dynamics were mixed in early Thursday trading.
S&P 500 and Dow Jones Industrial Average futures were down about 0.3%. Palantir stock was down 3.8% at $107.76 early Thursday. The second-day drop could be due to budget fears or something else—such as profit-taking or valuation.
Coming into Thursday trading, shares were up about 380% over the past 12 months. And Palantir stock trades in a different stratosphere compared with traditional defense companies, fetching about 209 times estimated 2025 earnings. Growth is the reason for the multiple. Wall Street projects about 30% average annual earnings growth for the coming few years.