U.S. defence stocks surged after President Donald Trump said he wants to raise military spending to US$1.5 trillion in 2027, far above current budget levels. The comments refocused investor attention on defence names as expectations grow for increased global military spending.
BNN Bloomberg spoke with David Sekera, U.S. chief market strategist at Morningstar, about defence stock valuations, political noise around spending proposals, and the risk of heightened equity volatility in 2026.
Key Takeaways
- Defence stocks rallied on renewed spending expectations, though political rhetoric is unlikely to change long-term intrinsic valuations.
- Morningstar expects higher equity volatility in 2026 as elevated valuations collide with policy and macroeconomic uncertainty.
- Defence spending growth is increasingly global, with Europe and other regions also ramping up military budgets.
- AI stocks remain supported by long-term demand but require stronger capital spending guidance to justify current valuations.
- Investors may benefit from balancing growth exposure with caution as volatility risks rise.
Read the full transcript below:
ANDREW: Shares in defence stocks are higher today. RTX, Northrop and Lockheed Martin are all up, with the latter rising nearly 10 per cent. U.S. President Donald Trump is calling for a military budget of US$1.5 trillion in 2027. Reuters reports the budget approved for this year is about US$900 billion, which would make this an enormous increase.We’re joined by David Sekera, U.S. chief market strategist at Morningstar. David, great to see you. Thanks very much.
DAVID: Good morning.
ANDREW: This could be just a number the president has plucked out of the air. That would be an enormous increase.
DAVID: Exactly. Love him or hate him, there’s never a dull day when President Trump is in office. But I think we need to put defence stocks in some context this morning.First, they sold off several per cent yesterday after President Trump said he wanted companies to halt stock buybacks, reduce dividends and cut executive pay, while spending more on growth capital expenditures. From our perspective, that’s largely rhetoric. It’s not clear how those measures could be implemented, so there was no change to our long-term intrinsic valuations.Today, the stocks are surging on talk of increased defence spending. With President Trump, you have to take this with more than a grain of salt. He often starts from an extreme position and then negotiates to the middle. Either way, it’s driving positive sentiment and acting as a catalyst for higher valuations today. At Morningstar, we’ve been constructive on defence stocks for quite some time.
ANDREW: Lockheed Martin and Northrop are two stocks you have rated as buys?
DAVID: Exactly. On The Morning Filter, my weekly podcast, one of the first stocks we highlighted more than a year and a half ago was Huntington Ingalls, a manufacturer of nuclear submarines. That stock has performed very well since then, and it’s still one investors should consider today.It’s often overlooked because it doesn’t have the same brand recognition as Lockheed Martin or Northrop. With today’s move, both stocks are now trading close to our long-term fair value estimates.For Lockheed, I’d expect the U.S. government to accelerate the delivery timeline for the F-35, which should provide a tailwind for at least the next couple of years. For Northrop, we expect progress on B-21 bomber deliveries, with original plans calling for about 100 aircraft between 2026 and 2028.Northrop also has significant exposure to space and defence systems, which should attract increased funding. Another name worth mentioning is Rheinmetall, a four-star-rated stock trading at roughly an 18 per cent discount to fair value, with a wide economic moat. It’s the largest defence contractor in Europe, and our base case assumes German defence spending reaches about 3.5 per cent of GDP by 2029. Defence spending growth isn’t just a U.S. story — it’s global.
ANDREW: Huntington Ingalls is also the largest military shipbuilder in the U.S.
DAVID: Exactly. It recently received a new contract from the U.S. Department of Defense to build frigates, which we’ve incorporated into our fair value estimate. That reflects strong confidence from the Pentagon, and we expect additional contract wins ahead.
ANDREW: Nvidia is always on our radar. What’s your view right now?
DAVID: We still think Nvidia is undervalued, but the next key catalyst will be AI capital spending guidance from hyperscalers later this month. Valuations across AI stocks are elevated, so further upside depends on stronger spending expectations.The market is already pricing in higher AI capex for 2026, so we’re watching guidance closely at the end of January and early February. We expect those numbers to be solid, which supports further upside.That said, this is one of several indicators pointing to higher volatility in U.S. equities in 2026 compared with 2025. Last year’s volatility eased relatively quickly. This year, with multiple risks in play, we expect a more turbulent environment.
ANDREW: David, always great speaking with you. Thanks very much. David Sekera, U.S. chief market strategist at Morningstar.
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This BNN Bloomberg summary and transcript of the Jan. 8, 2026 interview with David Sekera are published with the assistance of AI. Original research, interview questions and added context was created by BNN Bloomberg journalists. An editor also reviewed this material before it was published to ensure its accuracy and adherence with BNN Bloomberg editorial policies and standards.
