Global Defence Stocks Rally as Trump Proposes $1.5 Trillion US Military Budget for 2027

Global defence stocks experienced a significant rally following US President Donald Trump's announcement of a proposed $1.5 trillion military budget for 2027, marking a substantial increase from current spending levels. The announcement triggered widespread gains across both US and European defence contractors, despite lingering concerns about potential restrictions on capital returns.

US Defence Stocks Rebound Strongly

US defence stocks demonstrated remarkable resilience, recovering from Wednesday's sell-off that was triggered by Trump's warnings about potential restrictions on dividends and share buybacks for American contractors. The recovery was broad-based across the sector, with major contractors posting substantial gains.

Smaller defence firms also participated in the rally, with Kratos Defence and AeroVironment posting double-digit percentage gains during early trading sessions.

Massive Budget Increase Proposed

Trump's proposal represents a dramatic escalation in military spending, with the $1.5 trillion budget for 2027 significantly exceeding the approximately $900 billion approved for the current fiscal year. This increase reflects the administration's focus on strengthening military capabilities amid ongoing geopolitical tensions.

RBC Capital Markets analysts, led by Ken Herbert, indicated that such a substantial rise in defence spending could more than offset concerns around potential limits on capital returns, though uncertainty remains regarding the final budget size and congressional approval process.

European Defence Sector Participation

European defence stocks initially extended their rally but later moderated gains throughout the trading session. The regional aerospace and defence index closed approximately 1.30% higher after touching record highs earlier in the day. The sector has experienced sustained growth since Russia's invasion of Ukraine in 2022, driven by expectations of increased European defence spending.

Congressional Approval Challenges

Despite the market enthusiasm, congressional authorization for such a massive budget increase presents potential challenges. Trump's Republican Party maintains narrow majorities in both chambers of Congress, though the party has historically shown limited resistance to the president's spending priorities.

Capital Returns Concerns and Market Impact

Concerns persist regarding the future of dividends and share buybacks in the US defence sector. Industry analysis reveals that leading US defence firms typically offer average dividend yields close to 2.00% and have collectively repurchased approximately 2.00% of their market capitalization in recent years. While potential restrictions on capital returns are viewed negatively, analysts believe the overall impact would remain manageable given the substantial budget increase.

Some market participants anticipate Trump's stance may encourage investment rotation towards UK-based defence companies with significant US contract exposure, including BAE Systems and other mid-sized suppliers.

Fiscal Impact Warnings

Credit rating agency Moody's issued warnings that a large increase in US defence spending would likely worsen already elevated fiscal deficits. The agency's estimates suggest such spending increases would be difficult to offset through spending cuts or higher revenues elsewhere, given existing political and policy constraints. Moody's analysis indicates the proposed budget could significantly increase US debt over the next decade, raising interest costs and reducing fiscal flexibility despite potential short-term economic growth benefits.