Defense has been one of the most consistent institutional themes of 2026, and most retail investors are still treating it like a 2025 story.
Here is what has actually happened. The iShares U.S. Aerospace and Defense ETF (ITA) has gained 34% over the past year. The Trump administration has proposed a $1.5 trillion FY2027 defense budget, a historic 39% increase over FY2026’s $1 trillion topline. Within that proposal, $87 billion is earmarked for nuclear modernization, $54 billion for autonomous and remotely operated systems, and $17.5 billion specifically for the Golden Dome missile defense initiative. Global military spending hit $2.89 trillion in 2025, the eleventh consecutive annual increase. This is not a short news cycle. The combined order backlogs across the top five U.S. defense primes already exceed $700 billion.
And yet the discussion in mainstream financial media still centers almost entirely on Lockheed, RTX, and Northrop. That is where the surface-level analysis stops. What’s interesting is the emerging bifurcation happening underneath the primes level.
RTX raised its full-year 2026 guidance after Q1 adjusted EPS beat consensus by 17%. It remains the only one of the three primes to have lifted its full-year outlook. Lockheed’s $194 billion backlog spans roughly 2.5 years of sales, giving it extraordinary revenue visibility, but limited room for upside surprise beyond steady execution. Northrop Grumman’s B-21 Raider program is the most operationally leveraged story in the group: the program flipped from a $183 million loss to $305 million in profit in a single reporting period. Northrop also holds a strong position in missile defense, space systems, and advanced aircraft at a time when the FY2027 budget request dedicates serious capital to all three categories. The Zacks consensus estimate for NOC’s 2026 earnings per share implies an increase of 33.95% year-over-year.
Worth noting: Lockheed’s forward 12-month price-to-sales is 1.66x, a meaningful discount to the industry average of 2.76x. That gap has attracted value-oriented institutional money that is not showing up loudly in the headlines.
The Part People Skip
The more interesting money is starting to move toward smaller names. Counter-drone, electronic warfare, and resilient communications are the budget lines most likely to surprise to the upside through 2026 and into 2027. AeroVironment (AVAV), a pure-play drone specialist, sits in the higher-beta tier of this theme, as do names like Kratos Defense (KTOS) and Rocket Lab (RKLB) in adjacent roles. These are single-contract risk names with asymmetric upside, not core positions. But the institutions that are building positions in these now are doing it ahead of the budget’s formal passage, not after.
There is also the Honeywell Aerospace spin-off on June 29, 2026, creating a separately traded Honeywell Aerospace under ticker HONA. The Aerospace Technologies segment generated $4.32 billion in Q1 revenue at a 1.1x book-to-bill ratio. It is considered a near-certain addition to the ITA index at its next reconstitution. When a new pure-play aerospace stock enters a major sector ETF, passive flows follow mechanically. That creates a price dynamic that has nothing to do with valuation.
Risk Factors the Bull Case Skips
The proposed $1.5 trillion FY2027 budget depends on $350 billion from a reconciliation bill that has not yet cleared Congress. Budget reconciliation failure is the single biggest structural risk to the defense trade right now. A prolonged continuing resolution would delay procurement timelines and compress near-term revenue recognition for the primes. Fixed-price program exposure at LMT, NOC, and RTX also creates downside risk if scope creep accelerates beyond current modeling.
The primes are trading at roughly 22 to 25 times forward earnings, a premium to the S&P 500 and well above their own 10-year historical averages. The premium reflects backlog visibility and dividend reliability, not growth speculation. If the rate-cut path stalls or reverses, those multiples compress fastest among the highest-duration names in the group.
The framework that makes sense here is a barbell. Core positions in one or two primes for backlog-backed cash flow. Smaller tactical sizing in the drone and counter-drone names for asymmetric upside. And eyes on the Congressional budget timeline as the event that either confirms or disrupts the entire thesis heading into Q3.
The budget has not passed yet. The money is moving anyway.
