Defense Earnings Highlight Peril, Payoff of Contracting

These should be the best of times for defense contractors. Last month, NATO members agreed to boost their defense spending target to 5% of GDP by 2035, potentially unleashing hundreds of billions of public-sector dollars into the coffers of military contractors. And earlier this month, President Donald Trump’s One Big Beautiful Bill handed the Pentagon a record $1 trillion budget for 2026, a 17% year-over-year increase.

But the reality for military suppliers is far more complex. A slew of quarterly reports released last week showed that, even with analysts flashing buy recommendations, all it takes is an overrun on one top-secret program to turn an earnings release into a not-so-secret disappointment.

The Defense Dilemma

Like every other industry, the defense sector has been hindered by inflation in recent years. The distinct disadvantage for contractors is the long-term nature of many of their sales, which were negotiated years ago at lower prices and involve deliveries over extensive periods of time. With no easy fix (you can’t shrinkflate an F-35), the Aerospace Industries Association warned last year that defense firms were acting as an inflation “shock absorber” for the Pentagon, which could ultimately make them less inclined to take on risk.

The potential perils of this stress were on full display when America’s largest government contractor reported second-quarter performance:

• Lockheed Martin surprised investors by disclosing $1.6 billion in unexpected charges, most of them ($950 million) related to a classified program with a fixed-price contract signed in 2018. The firm’s income fell 80% year over year, from $1.6 billion to $342 million. Lockheed also hacked $1.5 billion off its 2025 operating profit estimate, bringing its forecast down to $6.6 billion, and saw its shares lose 8% through the week.
• Lockheed was caught in the crosshairs last month when the Pentagon cut an order for F-35s in half, weeks after Boeing won an upset bid over the contractor to replace its F-22 planes. RBC analysts said in a note that Lockheed will need to grow revenue 6.7% in the second half of the year or “elevated compared to peers” to meet its newly downgraded forecast.

About Those Peers: Inflation and price pressures aside, other defense contractors rounded out a solid week. Northrop Grumman raised its annual earnings guidance, citing its Sentinel intercontinental ballistic missile program, which the Pentagon is pouring more money into alongside B-21 stealth bombers. L3Harris, which manufactures rocket motors for Javelin missile systems, beat Wall Street expectations with $5.4 billion in sales. CEO Christopher Kubasik hailed a “clear inflection point, with our strongest top-line growth in six quarters.”