Defense Contractors Amass Record Backlogs as Military Spending Ramps Up

It was starting to look as if a kamikaze drone had blown up what some were calling a defense sector bubble. Heading into yesterday, shares in US defense contractors RTX and Lockheed Martin had fallen 3.8% and 22%, respectively, since the Iran war began on February 28. Investors fretted that defense spending could be nearing its peak, with the Trump administration’s latest Pentagon budget request marking the biggest ask since the nation held “fireside chats” with FDR.

After RTX and Lockheed reported Thursday, the fretting turned to buying as both firms revealed how today’s geopolitical environment could pay dividends for years.

‘Where is Your Upside?’

The Trump administration has asked for a 44% increase in military spending in 2027, bringing the Pentagon budget near $1.5 trillion. The Center for Strategic and International Studies estimates that would be “the highest level of funding in a single fiscal year since World War II.” On top of that, NATO members agreed last year to a massive rearmament plan requiring member states to raise defense spending to 5% of GDP by 2035. 

“Where is your upside to a +50% annual DoD budget request, with an unexpected military conflict on top?” Vertical Research Partners analysts wrote in April. On cue, both companies delivered a stellar second quarter. Lockheed Martin sales rose 11% year over year to $20 billion, and the company hiked its full-year revenue forecast to as much as $81.75 billion; shares rose 11%. RTX sales jumped 14% to $24.7 billion, and the company boosted its revenue forecast to as much as $96 billion. Shares gained 7.4%. 

The two firms also showed that this is no blip, with demand so strong it’s creating years’ worth of backlog:

• The combined backlog at both companies is now more than half a trillion dollars. Lockheed’s rose to a record $230 billion, up from $186 billion at the end of the first quarter, while RTX’s hit a record $289 billion, up from $271 billion.
• Demand for military equipment and technology far exceeds the industry’s production capacity: RTX’s backlog, for example, is more than three times its $88.6 billion in sales last year.

Patriot Games: If Trump’s Republican Party loses control of the next Congress, Pentagon spending plans will likely face greater scrutiny. But when it comes to missiles and ammunition, which Lockheed executives highlighted as one of the company’s main sources of growth, there’s bipartisan support for procurement and especially high demand for interceptors to counter drone attacks.