Analyzing the Q2 2025 Performance of Defense Stocks
The reporting period for Q2 2025 has begun for companies in the defense sector, which is part of the larger aerospace industry. Notable defense contractors, including Lockheed Martin, Northrop Grumman, Textron, and General Dynamics, have reported earnings that exceeded expectations. Given the prevailing geopolitical tensions, we anticipate favorable outcomes for the remaining defense sector companies, as increased global demand for defense-related products and services is likely to spur revenue growth and bolster order volumes.
Influence of Geopolitical Factors on Defense Revenue
Countries worldwide have escalated their defense expenditures in response to increased geopolitical instability, particularly due to ongoing conflicts in regions such as the Middle East. As the leading defense exporter, the United States has been proactive, with the government playing a critical role in sustaining the defense industry’s growth. For instance, it has been reported that a proposal was made for a 13% hike in U.S. defense spending, bringing it to $1.01 trillion for the fiscal year 2026.
This rise in budget allocations typically results in more extensive orders from defense ministries, potentially enhancing the order backlogs of major U.S. defense firms, thus improving revenue outlooks. The effects of these budget increases will likely become clearer as more defense companies disclose their second-quarter performance.
Ongoing conflicts, notably between Russia and Ukraine, as well as tensions involving Israel and Iran, have significantly influenced the financial health of the defense sector. Since the outset of Russia’s full-scale invasion of Ukraine in February 2022, the U.S. government has provided approximately $66.9 billion in military assistance, with additional funds allocated since previous incursions in 2014.
As of recent figures, the United States has 751 active Foreign Military Sales (FMS) contracts with Israel, valued at around $39.2 billion. These contracts cover essential defense systems such as the F-35 Joint Strike Fighter and military helicopters. Such comprehensive support inherently drives order growth for U.S. manufacturers, positively impacting their revenue.
Commercial Aerospace Impact
Firms like General Dynamics, which have significant interests in commercial aerospace as well as the defense realm, are also reaping benefits from a rebound in air travel. General Dynamics reported a notable 4.1% growth year over year in its Aerospace division. Other defense enterprises with commercial aerospace components may experience similar growth patterns.
Nevertheless, hurdles still pose challenges to these companies. Issues such as labor shortages and supply chain disruptions, compounded by new tariffs imposed by the U.S. on a wide array of trading partners, could affect production capabilities and delivery schedules, potentially impacting the firms’ overall second-quarter results.
Q2 Earnings Projections
Currently, the aerospace sector’s second-quarter earnings are predicted to increase by 11.5% compared to the previous year, with an anticipated sales growth of 24.8%.
Methodology for Stock Selection
Navigating the diverse defense sector to identify stocks poised for exceeding earnings projections can be challenging. However, the proprietary Zacks methodology simplifies this process by focusing on stocks that have a combination of a positive Earnings ESP (Earnings Surprise Prediction) and a Zacks Rank of 1 (Strong Buy), 2 (Buy), or 3 (Hold). Research indicates that stocks fitting this profile have up to a 70% chance of surpassing earnings expectations.
The Earnings ESP illustrates the percentage variance between the most accurate earnings estimate and the consensus estimate, allowing investors to pinpoint stocks with potential for an upward surprise.
Notable Stock Picks
Two companies are highlighted for their likelihood to exceed earnings expectations in this reporting cycle.
Archer Aviation is renowned for its electric vertical take-off and landing aircraft, which aim to service urban air travel. Additionally, the company is pursuing defense applications, collaborating with Anduril Industries to develop next-gen military aircraft. Recently, Archer secured $301.8 million in funding for this defense-focused hybrid aircraft platform. The firm is expected to release its earnings on August 11, with a consensus estimate of a loss of 19 cents per share, showing improvement from a loss of 24 cents a year prior.
Heico Corporation specializes in electronic equipment for both the aviation and defense sectors. As a key contractor for the U.S. Department of Defense, Heico is pivotal in supporting various government initiatives, including aircraft components and military-grade equipment. Anticipated increases in demand for military jets are expected to reflect positively in Heico’s upcoming earnings report, with a current consensus estimate targeting earnings of $1.12 per share, indicating a year-over-year increase of 15.5%.
With rising military spending and a robust demand for defense products, these companies are well-positioned to capitalize on current industry trends.
