The US’s top defence companies are missing out on the sector’s global rally after Donald Trump called on Europe to spend more on its own security while also vowing to cut the Pentagon’s budget.
Shares in the six largest US defence companies have fallen 4 per cent on average since Trump returned to the White House, while those of Europe’s top defence groups, led by Germany’s Rheinmetall, have surged almost 40 per cent in the same period.
South Korea’s defence companies have also emerged as winners as they tap into Europe’s rearmament drive. Shares in Hanwha Aerospace, the country’s largest player which has benefited from demand from Nato countries such as Poland and Romania, have risen more than 70 per cent.
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The diverging fortunes underline how Trump’s threat to scale back American military support for Europe’s security, alongside a cost-cutting drive across government led by tech billionaire Elon Musk along with last week’s purge of the Pentagon’s upper echelons, are reshaping investors’ views of the sector.
The industry faces unprecedented disruption, said Byron Callan, managing partner of research group Capital Alpha Partners.
There was uncertainty on several fronts for the US sector notably “about current and future programmes, the prospect of chainsaw-like cuts to government’s workforces and how other countries might react to changes in US international policies”, he said.
The performance of the US defence sector lagged behind Europe and Asia before last year’s presidential election, but Trump’s victory and his first month in office has widened the gap. However, shares in some US groups that have large civil aerospace businesses, notably Boeing and RTX, are higher.
Shares in Rheinmetall, Germany’s largest defence contractor, and Italy’s Leonardo rose more than 10 per cent last week as Trump’s decision to start peace talks with Russia over the Ukraine war strengthened expectations that Europe will ultimately have to shoulder more of the burden for its own security.
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German contractors’ shares rallied further on Monday on hopes of higher spending by the incoming government led by Friedrich Merz, despite some concerns on whether his plans may be stymied by parties opposed to arming Ukraine.
US defence groups, on the other hand, are among companies that are heavily reliant on federal spending and are braced for cuts to the Pentagon’s $850bn annual budget. The defence department said it was aiming to cut 8 per cent — or $50bn — of spending in fiscal year 2026. Similar-sized cuts are expected in subsequent years.
US defence secretary Pete Hegseth met with a so-called ‘Department of Government Efficiency’ team at the Pentagon last week, noting the focus of the cuts were “headquarters and fat and redundancies and top-line” items.
The sector received the largest amount of federal contract funding, according to analysts at Barclays, with Lockheed Martin, General Dynamics, RTX and Northrop Grumman among the top-10 beneficiaries of US government spending.
While the bulk of any cuts is expected to fall on areas such as civilian salaries, maintenance services, training and education, the industry’s large contractors were unlikely to be spared altogether, according to analysts.
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The most addressable portion of the US defence budget for the large government contractors, the so-called primes, is procurement, R&D and testing and evaluation. This represented “about 35 per cent of the total Department of Defense budget and may not be spared from cuts altogether”, said Morgan Stanley analysts.
Although the geopolitical backdrop and likely support for national security spending in Congress remained “constructive” for the sector, “the new administration’s signalled approach to government reform is injecting a wide range of uncertainty”, they added.
The prospect of technology-led groups such as Palantir and Anduril securing large slices of the Pentagon’s budget has also unnerved investors in traditional defence primes.
Shares in Palantir, chaired by Peter Thiel, a close confidante of Musk and vice-president JD Vance, are up 40 per cent this year on bets that close links to the Trump administration will boost sales to the US military and spy agencies.
Several defence executives have recently played down the impact of any cost-cutting, emphasising the country’s need for strong defence investment.
Christopher Calio, chief executive of Raytheon’s parent RTX, acknowledged there was “a lot of noise out there” at a recent investor conference but stressed there was “bipartisan support for a strong defence and a strong defence industrial base”.
There was also a “general alignment around . . . a peace-through-strength narrative and the need to project power globally”, he added.
In the shorter term, executives and analysts said there could be delays to contract awards given the change in administration. Doge could also likely try to renegotiate the terms of existing contracts rather than target actual programmes.
“In the first quarter, like often is the case, as we look at an administration transition in the US, there are some delays in getting things on contract,” said Kathy Warden, chief executive of Northrop Grumman, earlier this month. The company, she added, had therefore projected that growth would “gradually increase throughout the year”.
Additional reporting by Joseph Cotterill in London
