FT: Trump’s military spending cuts drive wedge between US and European defence stocks

The article by Financial Times explores the challenges faced by US defence companies as they lag behind global competitors amid rising military spending worldwide.

The US defence industry is struggling to keep pace with the global surge in military spending, as President Donald Trump’s calls for European nations to boost their defence budgets and his vow to cut Pentagon spending have left American defence companies trailing behind their global counterparts.

Since Trump’s return to the White House, shares in the six largest US defence firms have dropped by an average of 4%, while stocks in Europe’s leading defence companies, particularly Germany’s Rheinmetall, have soared by nearly 40%. South Korean defence companies have also capitalized on the growing demand for rearmament in Europe, with shares in Hanwha Aerospace, South Korea’s biggest defence player, climbing over 70% as it benefits from increased orders from NATO members like Poland and Romania.

This stark contrast in performance highlights how Trump’s stance on scaling back American military support for Europe, combined with his broader government cost-cutting efforts led by tech billionaire Elon Musk and a shake-up within the Pentagon’s leadership, is reshaping investor sentiment in the sector.

According to Byron Callan, managing partner of Capital Alpha Partners, the defence industry faces "unprecedented disruption," with growing uncertainty around ongoing and future defence programs, potential workforce cuts, and reactions from other countries to shifts in US international policies.

Prior to the 2024 election, the US defence sector already lagged behind Europe and Asia, but with Trump’s victory and his first month back in office, that gap has only widened. However, companies like Boeing and RTX, which have significant civil aerospace divisions, have seen their stock prices rise.

Shares in Rheinmetall and Italy’s Leonardo both surged over 10% recently, fueled by expectations that Europe will increasingly need to take on more of its security burden, especially after Trump’s decision to initiate peace talks with Russia over the Ukraine conflict. German defence contractors, in particular, saw further gains on hopes that the incoming government, under Friedrich Merz, will prioritize defence spending, though concerns linger about opposition to arming Ukraine.

Meanwhile, US defence companies are bracing for cuts to the Pentagon’s $850 billion annual budget. The Department of Defense is aiming to reduce spending by 8% — approximately $50 billion — in fiscal year 2026, with similar cuts expected in subsequent years. The focus of these cuts is likely to be on civilian salaries, maintenance services, and training, but major contractors could also face challenges. Analysts note that the most vulnerable parts of the defence budget for large contractors are procurement, research and development, and testing, which collectively account for about 35% of the total budget.

While Congress continues to show general support for national security spending, the uncertainty created by the new administration’s cost-cutting agenda is unnerving investors, especially with tech-oriented companies like Palantir and Anduril gaining ground in the defence sector. Palantir’s stock has risen 40% this year, fueled by expectations that its close ties to the Trump administration will boost its sales to the military and intelligence agencies.

Some defence executives have sought to downplay the potential impact of the budget cuts, emphasizing the bipartisan support for a robust defence industry. Christopher Calio, CEO of Raytheon’s parent company RTX, acknowledged the noise surrounding the issue but stressed the consensus around the need for a strong defence infrastructure.

In the near term, defence executives and analysts anticipate delays in contract awards due to the administration transition. Kathy Warden, CEO of Northrop Grumman, mentioned that the company expects growth to "gradually increase throughout the year," as delays in contracting are typical during such transitions.

By Tamilla Hasanova