US Defense: Q2 preview - Higher budgets, but constrained growth

Research evidence excerpt

US Defense: Q2 preview - Higher budgets, but constrained growth

17 July 2026

Global Aerospace & Defense

The Q2 setup is similar to Q1 with the Trump administration advocating (and now formally Douglas S. Harned, Ph.D.

+1 917 344 8430 submitting to Congress) a $1.5tn budget), plus an ongoing war in Iran. Since the start of

douglas.harned@bernsteinsg.com the war on February 28th, defense stocks have steadily declined. Prior to the conflict, US

defense stocks were trading at a 15% premium to the S&P500, which is consistent with

Adrien Rabier peak periods of geopolitical tension and rising budgets. Now, they trade at a discount in +44 20 7676 6820

adrien.rabier@bernsteinsg.com line with historical averages. In principle, this should be an attractive entry point, given

geopolitical risks and a likely large budget increase for investment, even if the total budget

Nestor Wester is well below the $1.5tn level. RTX is addressed in a separate report.

+44 20 7676 7067

nestor.wester@bernsteinsg.com

The problem here is that we have not seen near-term positive catalysts. We need resolution

of budget levels and potentially clarity on November elections. For background, see "USSpecialist Sales

Defense: Defenseless? As valuations sink - Searching for a catalyst”. But, beyond the budget

Steve Song environment, a key issue is the ability of companies to grow revenues even with high

+1 917 344 8401 demand and rising budgets. The challenges are particularly apparent when it comes to steve.song@bernsteinsg.com

tactical missiles, missile defense, and shipbuilding.

L3Harris (29 July) Space and Missile Solutions should be the key sources of growth,

with Space reinforced by the recent AMDT3 award. We are heading toward the MS IPO,

although we expect little discussion about it during earnings.