The Trump Administration has had the most active first 50 days of any administration in the past 50 years due to a multitude of Executive Orders and policy changes. The sheer volume of change has left many heads spinning. Investors are certainly reeling from the economic implications of tariffs, reduced federal employment and suspension of some government contracts resulting in the elimination of stock market gains since the election. Indeed, on March 10th, the NASDAQ 100 had its worst day since 2022 losing 3.8% and proving the adage that investors hate uncertainty.
In January, I wrote that defense tech was scaling new heights with the incoming Trump Administration. Today, 50 days into the term, that scaling may happen even more quickly than imagined.
This Administration is disrupting the status quo. In Silicon Valley, the word disruption is so common that it epitomizes tech industry ethos. Defense tech, in particular, aspires to disrupt a defense industry of legacy players, deeply entrenched interests, and bureaucratic inefficiency. President Trump’s defense officials understand that our national security depends on the success of this disruption, which began long before President Trump’s current term and must continue beyond it. In other words, while some Administration actions are creating chaos in the public markets, others are sustaining consistent tailwinds for defense tech which includes the advanced, and often commercial, technologies critical for national security such as AI, cyber, autonomy, and space.
Underpinning the need for disruption are tailwinds resulting from long-term factors at play: namely, increasing geopolitical tensions and the effective military use of commercial technologies deployed in the Ukraine conflict but which will affect all future conflicts. Key to the efficacy of these new technologies is increasingly capable software- or AI-enabled functionality providing more resilient communications, connected sensors, drones, and cyber-hardened systems for better decision making. Confirmation hearings and early pronouncements from new defense officials, including Secretary of Defense Pete Hegseth, make it clear that the Department of Defense plans to procure more commercial technology, rapidly adopt unmanned systems and reduce the red tape to speed new capabilities to warfighters.
A Disruptive Agenda at the Defense Department
Since Secretary Hegseth’s arrival at the Pentagon, we see several reinforcing actions. First, there is a study underway to understand what new technologies could be deployed as part of a nation-wide missile defense program called “Iron Dome.” This program would be a boon to space-based sensors and launch capability. Second, the Defense Secretary issued a directive on March 7th to speed software acquisition through the use of Other Transactions (a rapid contracting alternative to Federal Acquisition Regulations) which encourage new software companies to compete for contracts through a Commercial Solutions Opening process pioneered by the Defense Innovation Unit. Third, there are strong indications that the Pentagon will form “a new commercial-engineering version of DARPA” to speed procurement of cutting-edge technologies by combining several organizations with the Defense Innovation Unit. Additionally, President Trump announced the new White House Office of Shipbuilding to revitalize shipbuilding capability for commercial and military purposes.
These new initiatives build on successes of the past Administration including the record $1 billion appropriated by Congress to DIU and the $1 billion in loans deployable by the Office of Strategic Capital to shore up key parts of the defense industrial base. The Replicator initiative, announced in August 2023, is now approaching its goal of fielding thousands of attritable, unmanned systems into the Indo-Pacific theatre by this summer. The Trump Administration’s policies reinforce the pivot from Europe to the Indo-Pacific theatre as paramount to America’s future security.
Even cautionary signs such as Secretary Hegseth’s directive to plan for 8% reduced budgets are potentially exercises to reallocate funds from historical programs to better align with the Administration’s agenda. In fact, Secretary Hegseth’s exceptions to the planned 8% reductions specify the areas supporting the new agenda that will not be reduced: cyber, autonomous systems (like the USAF’s Collaborative Combat Aircraft), counter-drone systems and support for the Indo-Pacific theatre.
Disruptive Agenda Affects Companies Differently
In this new era, traditional aerospace and defense stocks have not performed well. Over the past three months, stocks like Lockheed Martin and General Dynamics have performed poorly, declining by 19% and 13%, respectively, due to concerns over reduced military budgets and shifting U.S. foreign policy priorities. Similarly, the stock of the nation’s largest shipbuilder, Huntington Ingalls, is down 34% in the last 12 months, reinforcing the need for White House focus on this industry. But these stock declines are evidence of the coming trend shifting relative spending away from large defense platforms—like fighter jets and tanks—and towards software-enabled capabilities, unmanned systems, and space assets. The companies developing these new technologies are experiencing record valuations including SpaceX at $350 billion (up 67% in 2024), Anduril at $28 billion (up 100% last year) and Palantir at $179 billion (up almost 5X in the last year). In fact, the market cap of these three companies alone are 10% more than the combined market cap of the five largest U.S. defense primes: Boeing ($135 billion), RTX Corporation ($118 billion), Lockheed Martin ($104 billion), Northrop Grumman ($78 billion) and General Dynamics ($67 billion).
Compelling Need For New Defense Platforms And New Technologies
Uncertainty still surrounds the yet-to-be-passed defense budget for this fiscal year, but both the House and Senate versions of defense appropriations are signalling large increases of $150 billion and $100 billion, respectively. The need for more defense spending is essential to support the President’s tenet of “peace through strength” as the nation spends only 2.9% of GDP on defense, the lowest level in 75 years. Furthermore, only 21% of the fiscal year 2024 defense budget was appropriated to buy both older platforms (aircraft carriers and fighter jets) and newer technologies (unmanned systems and AI-based software). Consequently, there is an even more compelling need to modernize aging fleets and squadrons while also buying complementary emerging technologies. DOGE’s efforts may create room through increased efficiencies for more spending on these new platforms and new technologies. The increases contemplated by the House and Senate may be modest on the overall $850 billion defense budget but if the Pentagon spends more on new technologies, these increases will be significant for the smaller companies supplying AI, cyber tools, autonomy and space systems.
While there is a dizzying degree of change in the Trump Administration’s opening days, the disruptive themes for military modernization are quite consistent and clear. The actions and the rhetoric align to emphasize procuring commercial technology, broadening the defense industrial base, and adopting more software-enabled and unmanned systems. This consistency underscores increasing value for a new wave of defense suppliers following the groundbreaking paths of Anduril, Shield AI and Palantir to include next generation companies like HawkEye 360, SeaSats, Albedo, and Starfish Space. More than ever before, our nation’s security relies on our military deploying new technologies like AI, cyber, autonomy and space—the industries of the future—where America still leads the world.
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