Defense Sector Outlook: $1.5T Budget Boost Highlights Lockheed, Northrop, and ITA ETF

Context: The FY2027 Defense Budget Surge

On April 17, 2026, President Donald Trump submitted his proposed budget for the 2027 fiscal year. The proposal outlines a massive $500 billion increase in funding for the Department of Defense, bringing the total military allotment to $1.5 trillion. This surge is partially offset by a 10% reduction in non-defense spending. As global unrest continues, analysts suggest that this influx of capital will significantly benefit major defense contractors and related exchange-traded funds (ETFs) over the coming years.

Lockheed Martin: A Century-Old Giant with Record Backlogs

Lockheed Martin (NYSE: LMT), a company with over 100 years of history, employs more than 120,000 people globally. The firm generates approximately $64 billion in annual revenue across four key sectors:

• Aeronautics: ~$20 billion
• Missiles and Fire Control: ~$14 billion
• Rotary and Mission Systems: ~$17 billion
• Space Projects: ~$13 billion

Investors are drawn to Lockheed Martin for its shareholder returns, which include a 2.2% dividend yield. When accounting for stock buybacks, the total effective yield rises to 4.3%. Furthermore, the company's contract backlog reached a record $194 billion at the end of 2025. Geopolitical tensions have already driven demand; for instance, Greece is considering spending upwards of $4 billion on Lockheed fighter jets.

Northrop Grumman: Innovation in Stealth and Drones

Northrop Grumman (NYSE: NOC), with a market cap of roughly $96 billion, employs over 40,000 engineers. The company describes its role as critical to global stability, stating: "As a national resource, our industry plays a critical role in supporting the warfighter to maintain global and economic stability and protect the security of America and its allies." Their portfolio includes stealth bombers, nuclear missiles, submarines, and drones like the MQ-4C Triton, which boasts an effective range exceeding 8,000 nautical miles.

Northrop Grumman offers a dividend yield of 1.4%, with a total yield of 3% when including share repurchases. The company has increased its payout annually for more than 20 consecutive years, raising it by 11% in 2025. In the fourth quarter, revenue grew 10% year over year, and the order backlog hit a new high of $96 billion.

Diversified Exposure via ETFs

For investors seeking broader exposure without selecting individual stocks, the iShares U.S. Aerospace & Defense ETF (NYSEMKT: ITA) is highlighted as a primary option. This fund holds positions in more than 40 defense and aerospace companies, including Lockheed Martin, Northrop Grumman, GE Aerospace, RTX, and Rocket Lab.

Historical performance for the ITA ETF has been robust:

• 10-Year Average: ~16% annual gains
• 25-Year Average: ~16% annual gains
• 3-Year Average: 28%

Important Investment Caveats

Despite the positive outlook on defense spending, The Motley Fool's Stock Advisor team has identified specific reservations. In their latest analysis of the "10 best stocks for investors to buy now," Lockheed Martin was notably excluded.

The article contrasts this exclusion with past high-performing recommendations, such as Netflix (December 17, 2004) and Nvidia (April 15, 2005). A $1,000 investment in those stocks at the time of recommendation would have grown to $581,304 and $1,215,992 respectively. The Stock Advisor team cites a total average return of 1,016% compared to the S&P 500's 197%.

Disclosure: Selena Maranjian holds no position in any mentioned stocks. The Motley Fool recommends Lockheed Martin, GE Aerospace, RTX, and Rocket Lab.

Takeaway

While President Trump's proposed $1.5 trillion defense budget for FY2027 creates a favorable environment for major contractors like Lockheed Martin and Northrop Grumman, investors should weigh the sector's stability against specific analyst recommendations that currently exclude these giants from their top 10 buy list.