Wall Street Started Loving Defense Stocks Right as the Pentagon Announced Plans to Upend the Entire Industry

The defense sector just wrapped up its strongest year in two decades, but not every contractor is cashing in. Defense Secretary Pete Hegseth threw down the gauntlet in a Nov. 7 speech at the National War College, warning legacy contractors to “change the focus on speed and volume” or “fade away.” His message hit squarely at the industry giants that have dominated military contracts for decades — a group that’s shrunk from 51 major players in 1990 to just five today.

Procurement revolution: The Pentagon is quietly tearing up its old rulebook, cutting layers of red tape and oversight while empowering a new “deal team” to strike bold, fast-moving business arrangements. According to a draft memo obtained by Bloomberg, military departments now have 60 days to submit implementation plans and 180 days to deliver fresh contracting guidelines with “clear incentives for timely delivery.” To fuel the shift, the newly formed Economic Defense Unit will deploy capital through grants, loans, purchase commitments, and even direct equity stakes — echoing recent investments in IntelINTC

and rare-earth producer MP MaterialsMP

.

• The “Trump effect” has added about 1.2 points to the S&P 500’s 14.1% gain since Inauguration Day, with NATO’s 5%-of-GDP defense pledge fueling hopes of a long contract boom.
• Aerospace and defense EPS are forecast to surge 56% in 2025, 22% in 2026, and 16% in 2027 — and even those projections may prove conservative.

Explosive Growth, Shaky Grounds

Under Trump’s presidency, defense stocks aren’t just performing well on fundamentals — they’re trading at valuations even Wall Street struggles to justify. Palantir TechnologiesPLTR

, which powers the “kill chain” for battlefield operations, now boasts a $476B market cap at roughly 247x blended forward earnings. American Enterprise Institute’s Todd Harrison noted that while traditional contractors offer transparency and stability, the new wave of defense firms remains “very opaque,” with far higher risks of fraud and abuse.

• The iShares US Aerospace & Defense ETF is up 41.1% this past year, but stocks have lagged — with Lockheed MartinLMT
  down 20.8% while Northrop GrummanNOC
  rose a mere 5.5%.
• The Global X Defense Tech Index trades at 28x projected earnings versus 23x for the S&P 500, with over 20% of its companies already above their 12-month price targets.

Forward march: Hegseth noted the Pentagon will shift from limited-competition contracts to “harness more of America’s innovative companies” willing to “assume risk to partner with the United States.” Yet as these reforms threaten to upend the Pentagon’s long-standing ties with its legacy suppliers, Harrison warned that if contractors don’t feel incentivized “to check all the boxes,” they “may deliver something faster, but it may not do what you want it to do.”