S&P 500 defense stock Northrop Grumman earned "top pick" status on Wednesday while Lockheed Martin was upgraded as analysts believe President Donald Trump's $1 trillion defense budget and two executive orders are "improving the backdrop for U.S. defense" stocks.
Morgan Stanley analyst Kristine Liwag on Wednesday upgraded the defense sector view from "in-line" to "attractive." Within the industry, Liwag handed the "top pick" status to Northrop Grumman, increasing the stock price target to 625, from 580. The target was not quite 16% above where shares traded on Wednesday.
Morgan Stanley also upgraded Lockheed Martin to an overweight rating with a 575 price target, almost 20% above current levels.
Morgan Stanley sees Trump's $1 trillion defense budget for fiscal year 2026 along with the president's executive orders to review major defense programs and accelerate acquisitions and to reform foreign defense sales as signs the sector outlook may be improving.
"Concerns over the trajectory of U.S. defense spending and potential DOGE headwinds have kept Defense investors largely on the sidelines since the November U.S. election. However, as we see more carrots than sticks for the U.S. Defense industry, we upgrade our industry view on defense to attractive from in-line," Liwag wrote.
While the firm upgraded LMT, it also downgraded General Dynamics to equal-weight, from overweight, and cut its price target to 305, from 315.
Defense In the S&P 500: Earnings Upcoming
S&P 500 defense stocks Lockheed Martin and Northrop Grumman both advanced more than 1% during Wednesday's stock market action even as Federal Reserve Chairman Jerome Powell signaled that outsized Trump tariffs may create a "challenging scenario" for policymakers, with their dual mandate to control inflation and support employment in "tension."
Fellow S&P 500 component General Dynamics stock edged down around 0.2% to 276.65 during the stock market trade.
The 71 stocks in the IBD Aerospace/Defense industry group have collectively added 0.7% in 2025. That puts the industry at No. 9 out of the 197 industry groups tracked by IBD.
Lockheed Martin reports first-quarter earnings early Tuesday with analysts expecting profit to run flat compared to a year ago. Meanwhile, Northrop Grumman Q1 financials are also due before the stock market opens on Tuesday. Analyst consensus has Q1 EPS falling less than 1%, according to FactSet. General Dynamics reports early on Wednesday.
Liwag added Wednesday that Trump's recent wave of tariff announcements "may also prove net positive for defense players." The analyst noted that the U.S. defense sector's supply chains are largely, and strategically, domestic.
"The new administration, in our view, is also signaling more continuity than disruption vis-a-vis the U.S. defense industrial base," the analyst wrote.
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