Al Root

Earnings for the U.S. defense sector are coming, and will land about a week after a Monday meeting between President Donald Trump and NATO General Secretary Mark Rutte.

Shares of large American defense contractors have had a tough few months, but things should get better, according to one Wall Street analyst.

Trump has criticized NATO for its EU member nations falling short of their NATO contributions and failing to spend more on their own national defense -- leaving the U.S. to pick up the slack. After new commitments from Europe, the president feels better about NATO, which is a positive for the defense sector.

NATO was created in 1949 by the U.S., Canada, and several Western European nations to provide collective security against the former Soviet Union. NATO's annual budget is about $5 billion. The U.S. pays a little less than $800 million of that.

NATO's annual budget is a drop in the bucket of overall military spending. The bigger issue is annual spending by its member nations. In 2024, the U.S. spent roughly $3,000 per citizen on national defense. The number for Europe was closer to $700.

Things are changing, though. In late June, NATO countries committed to spending roughly 3.5% annually on core defense technologies, which implies more than a doubling of total spending for European nations.

The prospect of higher spending has helped boost European defense stocks substantially. Coming into Monday trading, shares of Britain's BAE Systems, Germany's Rheinmetall, France's Thales, and Italy's Leonardo were up almost 130% on average since America's Nov. 5 presidential election.

Shares of Lockheed Martin, Northrop Grumman, General Dynamics, and L3Harris Technologies were down an average of 2% over the same span, while the S&P 500 was up about 8%. Lockheed has been hit hardest, down 14%. Investors are worried sales of its F-35 fighter jet will slow in a second Trump administration.

Lockheed's potential F-35 slowdown aside, the issue for U.S. defense contractors appears to be more sentiment than spending. Trump plans to spend about $1 trillion on defense in fiscal 2026, up roughly 13% year over year.

Most defense stocks were up more than 1% on Monday, with RTX leading the way, up 1.6%. RTX makes Patriot missile defense systems, and Trump committed to sending more Patriots to Ukraine.

Citi analyst Jason Gursky sees sentiment continuing to improve in the second half of the year, primarily for a few key reasons. DOGE-related spending cut headlines should subside. International demand should remain strong, given the EU's spending goals. And U.S. demand is growing too.

"As such, we remain almost exclusively Buy-rated across our coverage universe," he wrote on Monday.

Gursky's "top picks" are Huntington-Ingalls Industries, Northrop, RTX, L3Harris, Lockheed, and Karman.

"It appears investors are pricing in negative 3% to positive 2% growth into most companies indefinitely," added Gursky. "A level we believe undershoots likely outcomes over the longer term."

Military spending, historically, has grown at roughly 3% a year on average for the past 20-plus years.

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

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July 14, 2025 15:36 ET (19:36 GMT)

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