Aerospace, defense stocks surge after Trump's proposed $1.5 trillion military-spending budget - but are investors too optimistic?

By Christine Idzelis

Aerospace and defense ETFs rebounded Thursday, with their 2026 rally beating the S&P 500

ETFs that target aerospace and defense stocks are beating the S&P 500 so far in 2026.

Heightened geopolitical tensions and investor expectations for an increase in the U.S. military budget have stoked a rebound Thursday in exchange-traded funds that buy stocks in the defense industry.

The U.S. equities market has broadly pressed higher this year despite escalating geopolitical worries, as investors expect companies will continue to grow earnings in a still-expanding economy, said Larry Adam, chief investment officer at Raymond James, in an interview.

But on Thursday, investors were signaling renewed optimism about prospects for earnings of aerospace and defense companies in particular. ETFs focused on such stocks were adding to their 2026 surge, with the iShares U.S. Aerospace & Defense ETF ITA, Invesco Aerospace & Defense ETF PPA and State Street SPDR S&P Aerospace & Defense ETF XAR all rising Thursday, following President Donald Trump's social-media post after the stock market's close on Wednesday about increasing the U.S. military budget in 2027.

The White House also posted on social media "President Trump's perspective that the U.S. defense budget should increase to $1.5 trillion, a staggering 50% increase from the current $962 billion that was requested for fiscal 2026," said equity analysts at William Blair in a note Thursday.

"This informal $1.5 trillion proposition takes place as global geopolitical tensions have spiked to start the year," they said. "The official White House fiscal 2027 budget request will likely be released in March."

Aerospace and defense ETFs have soared in 2026, with the State Street SPDR S&P Aerospace & Defense ETF surging more than 11% through Thursday, according to FactSet data. The Invesco Aerospace & Defense ETF has climbed almost 7% this year, while the iShares U.S. Aerospace & Defense ETF ITA has advanced nearly 6% in 2026 through Thursday.

The U.S. capture of Venezuelan President Nicolás Maduro last weekend has added to geopolitical risks globally. Investors are watching for signs of tensions with China, which has economic interests in Venezuela and Latin America more broadly, as the U.S. appears to be positioning to increasingly dominate the Western Hemisphere. Meanwhile, the war between Russia and Ukraine has continued and tensions remain high in the Middle East, with Reuters on Thursday reporting Israeli air strikes in the Gaza Strip.

Aerospace and defense ETFs had struggled during the afternoon trading session on Wednesday after Trump raised concern over social-media that stock buybacks in the defense industry came at the expense of investment in plants and equipment. His social-media posts reflected concern that defense contractors weren't responding fast enough to the demands of the U.S. government, singling out Raytheon (now known as RTX (RTX)) in a post on Truth Social on Wednesday just after the U.S. stock market closed.

Trump then indicated in a separate social-media post Wednesday that the U.S. military budget for 2027 should be increased. "After long and difficult negotiations with Senators, Congressmen, Secretaries, and other Political Representatives, I have determined that, for the Good of our Country, especially in these very troubled and dangerous times, our Military Budget for the year 2027 should not be $1 Trillion Dollars, but rather $1.5 Trillion Dollars," Trump wrote in a social-media post on after the stock market's close Wednesday.

That appears to have triggered an upswing in investor sentiment surrounding defense stocks after they fell under pressure Wednesday. The iShares U.S. Aerospace & Defense ETF closed 1.7% lower Wednesday after Trump's post about stock buybacks in the defense industry, snapping three straight days of gains to post its biggest drop since the start of December, according to FactSet data. The ETF's top holdings as recently as Wednesday were GE Aerospace (GE), RTX and Boeing (BA), fund data on BlackRock's website showed.

"In our view, a $500 billion defense budget increase is unlikely," the equity analysts at William Blair said. "Instead, it seems like the starting point in a negotiation."

The U.S. stock market ended mixed Thursday, with the Dow Jones Industrial Average DJIA rising 0.6%, the S&P 500 SPX increasing less than 0.1% to close nearly flat and the technology-heavy Nasdaq Composite COMP falling 0.4%. Aerospace and defense ETFs have outperformed the broader U.S. stock market in January, with the S&P 500 up 1.1% through Thursday.

-Christine Idzelis

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01-08-26 1825ET