Why Trump's New Arms Export Play Could Reshape Defense Stocks: Risks & Rewards

Key Takeaways

• You can’t ignore the new export‑first policy – it directly fuels order books of the biggest defense OEMs.
• Lockheed Martin and Raytheon stand to gain multi‑year production ramps on Patriot interceptors and Tomahawk missiles.
• NATO allies pressured to hit a 5% of GDP defense spend target will become prime customers, raising their procurement cycles.
• Historical parallels show that export‑centric policies often precede a surge in defense earnings, but also bring geopolitical risk.
• Investors should weigh a bullish case of higher margins against a bearish scenario of supply‑chain bottlenecks and policy reversals.

Most investors missed the new export‑first policy. That was a mistake.

The Trump administration just signed an executive order that flips the traditional playbook for U.S. arms sales. Instead of using exports as a diplomatic lever, the order makes bolstering the domestic defense industrial base the top priority. In plain language, the U.S. government will now push foreign partners to buy American weapons that are most critical to our own warfighting needs, and it will create a "sales catalog" that highlights those systems. For investors, that means a clear, policy‑driven demand pipeline for the very platforms that drive earnings at the sector’s titans.

Trump Administration's Defense Export Strategy: What Changed?

The executive order does three things that matter to the market:

• Prioritizes weapons that replenish depleted stocks. The Pentagon’s recent seven‑year contracts with Lockheed Martin and RTX’s Raytheon division to boost Patriot interceptors and Tomahawk missiles illustrate the focus on high‑use munitions.
• Links export incentives to allied burden‑sharing. NATO members are being urged to hit a 5% of GDP defense spending target, turning them into "pay‑to‑play" customers for the cataloged systems.
• Creates an inter‑agency sales catalog. The State, Commerce, and Defense departments will jointly curate a list of prioritized weapons, effectively signaling to global buyers which U.S. products will receive diplomatic backing.

By weaving export policy with industrial base health, the order reduces the traditional “soft‑power” rationale for sales and replaces it with a hard‑core supply‑chain strategy.

Impact on Lockheed Martin and Raytheon: Order Books Get a Boost

Both Lockheed and Raytheon have already secured long‑term production agreements for their flagship systems. The new export focus could expand those contracts in two ways:

• Volume Upside: Allies that must meet the 5% GDP rule will likely purchase additional Patriot batteries and Tomahawk missiles, pushing unit volumes higher.
• Pricing Power: With a government‑endorsed sales catalog, the U.S. can negotiate favorable pricing terms, protecting margins even as raw‑material costs rise.

Financially, higher volumes translate to a lift in backlog, a key driver of earnings visibility for defense firms. Historically, a surge in backlog has preceded earnings beats for both companies, as seen after the 2014 Ukraine crisis when demand for Patriot systems spiked.

What NATO Allies’ 5% GDP Target Means for Your Portfolio

The 5% target is more than a political talking point; it’s a fiscal commitment that will reshape procurement calendars across Europe and Canada. Countries that lag behind will need to accelerate acquisitions, often opting for proven U.S. platforms to meet timelines. This creates a cascade effect:

• Increased orders for air‑defense, long‑range strike, and ISR (intelligence, surveillance, reconnaissance) systems.
• Higher demand for supply‑chain components—electronics, propulsion, and advanced composites—benefiting tier‑1 and tier‑2 suppliers.
• Potential upside for ETFs and mutual funds that hold a basket of defense manufacturers.

For investors, the signal is clear: firms with a strong presence in NATO‑approved catalogs stand to benefit disproportionately.

Historical Precedents: When Export Policies Fueled a Defense Rally

Two prior U.S. administrations used export incentives to shore up the industrial base. In 2002, the Bush administration’s “Foreign Military Sales (FMS) Reform” linked export approvals to production capacity, coinciding with a 12% rise in defense earnings over three years. A decade later, the Obama‑era “Export Control Reform” emphasized technology transfer to allies, which preceded a surge in sales of F‑35 components to partner nations.

Both episodes share a pattern: policy‑driven export expansion → higher order backlog → earnings acceleration → stock price outperformance versus broader market. However, each also carried risk—geopolitical backlash or supply‑chain strain—that temporarily dented margins.

Technical Corner: Understanding the “Sales Catalog” Concept

The term “sales catalog” may sound bureaucratic, but it’s essentially a curated list of weapons that the U.S. government will actively promote to foreign buyers. Think of it as a “must‑sell” menu that comes with diplomatic support, streamlined export licensing, and potentially faster payment terms. For investors, a system’s appearance on the catalog is a leading indicator of future sales growth.

Investor Playbook: Bull and Bear Cases

Bull Case: The export‑first order creates a structural demand tailwind for top‑tier OEMs and their supply chain partners. Backlogs expand, margins improve due to scale, and the “burden‑sharing” push forces allies to buy U.S. systems, reinforcing revenue visibility. Defensive stocks could outperform by 5‑7% annualized relative to the S&P 500.

Bear Case: The strategy hinges on sustained political will. A shift in administration or a diplomatic fallout could stall the catalog rollout. Additionally, rapid production increases risk bottlenecks in semiconductor or rare‑earth supply chains, compressing margins. If geopolitical tensions de‑escalate, foreign buyers may defer purchases, leading to order cancellations.

Risk‑adjusted positioning might involve a core holding of a diversified defense ETF, complemented by a selective overweight in firms with the highest catalog exposure—currently Lockheed Martin (LMT) and Raytheon Technologies (RTX).

Bottom Line: The Export Policy Is a New Engine for Defense Growth

By turning arms exports into a strategic tool for industrial base resilience, the Trump administration has effectively written a growth script for the sector. Investors who act now—by reviewing exposure to catalog‑eligible systems and aligning with allies’ budgetary pushes—stand to capture the upside while staying vigilant for policy‑driven headwinds.