Something has quietly shifted in how money is flowing through the defense sector, and most retail investors are still looking at the wrong side of the trade.

The White House dropped a $1.5 trillion defense budget request for FY2027 in early April. That’s a 44% increase over the FY2026 funding level – and if Congress plays along, it would mark the largest single-year defense spending jump since the Korean War. The request represents a $445 billion increase over FY2026, and if enacted, would exceed even the Reagan-era buildup of the 1980s. That’s not hyperbole. That’s the actual math.

Now here’s where it gets interesting.

European defense stocks re-rated aggressively over the past year – they’re priced for a long war and a generational spending cycle. Meanwhile, U.S. names like Lockheed Martin, RTX, and Northrop Grumman are still sitting at what look like relative discounts. LMT trades at 16.88x forward earnings, compared to General Dynamics at 20.67x, Northrop Grumman at 20.17x, and L3Harris at 27.78x. The franchise name in the group is the cheapest one in the room. That’s the setup.

What the budget actually buys

The Golden Dome is the headline. The Trump administration’s missile defense shield already received a $23 billion down payment through a reconciliation bill passed last summer, and the FY2027 request adds another $17.5 billion on top of that. President Trump has said the multilayered system will be operational before his term ends in early 2029. Aggressive timeline. Enormous dollar commitment either way.

Slight tangent, but it matters: the reconciliation dependency here is real. The base budget request for fiscal 2027 includes only approximately $400 million for Golden Dome, with the remaining $17.1 billion expected to come from reconciliation funding if approved by Congress. That’s not guaranteed. Political risk is embedded in the upside case. Worth keeping in mind when sizing a position around the missile defense theme specifically.

Beyond Golden Dome, the FY2027 budget requests 85 F-35 aircraft – 38 F-35As, 10 F-35Bs, and 37 F-35Cs – a significant increase from the 47 aircraft funded in FY2026. And B-21 bomber program spending is rising from $5.6 billion in enacted funds to $6.1 billion under the president’s proposal. These aren’t rumors. They’re line items.

Three names sit at the center of all of this. Here’s where I’m at on each one.

Lockheed Martin (LMT) is the core position. The backlog came in at $186.4 billion at the end of Q1 2026. Full-year 2026 guidance has been reaffirmed, with expected sales between $77.5 billion and $80.0 billion, diluted EPS in the range of $29.35 to $30.25, and free cash flow projected between $6.5 billion and $6.8 billion. The stock has pulled back from its earlier highs, which is exactly when the valuation argument gets interesting. The $186.43 billion backlog, reaffirmed full-year guidance, and a forward multiple below defense peers all point to a business the market is currently undervaluing. And a nearly 2.7% dividend yield adds an income component that supports the total return case while investors wait for the valuation gap to close.

RTX Corporation (RTX) is the reactive one. Patriot PAC-3 demand across Europe and Asia drove the backlog to record levels, and the company just raised guidance after Q1. Management lifted 2026 adjusted sales guidance to $92.5–$93.5 billion and raised adjusted EPS outlook to $6.70–$6.90, with free cash flow guidance reaffirmed at $8.25–$8.75 billion. RTX moves sharper on escalation news and dips harder on ceasefire headlines – which makes it the most tactical of the three. The part people skip: munitions depletion cycles tend to run longer than geopolitical headlines. Restocking takes years, not quarters.

Northrop Grumman (NOC) is the duration play. The company reported Q1 2026 net awards of $9.8 billion and a backlog of $96 billion, with sales increasing 4% to $9.9 billion. Full-year 2026 sales outlook is reaffirmed at $43.5 to $44.0 billion, with free cash flow guidance of $3.1 to $3.5 billion. The thesis here isn’t about any specific conflict. It’s about the nuclear triad. The B-21 Raider acceleration deal closed in late February 2026, involving a $2 to $3 billion investment over a multiyear period with improved return potential. A ceasefire in any theater doesn’t cancel a multi-decade nuclear modernization program. That’s the key distinction between NOC and the others.

The risk the tape isn’t pricing

Backlogs at $186B, $96B, and $268B respectively sound bulletproof. They’re not.

The shift happening right now – for Lockheed and RTX especially – is from winning contracts to executing them under cost pressure. Labor shortages are real. Material inflation hasn’t gone away. A delay in F-35 deliveries or a cost overrun on B-21 sends these stocks lower fast, regardless of what the Pentagon’s budget says. The Sentinel ICBM program has already gone through one significant restructuring. The Air Force anticipates attaining Milestone B approval for the Sentinel program by the end of 2026, following significant cost overruns and a prior program restructuring. That’s the program NOC lives with for the next two decades. Execution risk doesn’t get enough airtime in the bull case.

Also: substantial reconciliation funding is intended to replenish stocks of theater medium- and intermediate-range missile interceptors expended during the U.S.-Israeli conflict against Iran that began in February. That’s a tailwind for RTX specifically – but it also means the demand driver is war consumption, which doesn’t necessarily run in a straight line. Ceasefire news compresses the war premium fast. Plan around that.

At first glance, this sector looks fully owned. The year-to-date gains across the group make it feel like the trade is over. It isn’t – at least not for names that still sit below the valuation of their European counterparts and below several U.S. peers, while holding multi-year backlogs that don’t reset on a single headline.

LMT is the core hold. NOC is the long-duration anchor for anyone willing to look past FY2027. RTX is the tactical add on pullbacks, especially if munitions restocking stays in focus. The world is rearming at a pace not seen in decades, and the companies building that arsenal are still trading at a discount to what the spending cycle arguably justifies.

Whether the gap closes this year or next is the part nobody can tell you with a straight face.

Wall Street Mavens