Global defense spending is entering a historic expansion phase, driven by geopolitical flashpoints from Ukraine to the Indo‑Pacific and record Pentagon budgets. NATO allies are racing to meet or exceed 2% of GDP defense commitments, while the U.S. has proposed a $1.5 trillion military budget for FY2027. Against this backdrop of rising military allocations and urgent weapons replenishment, Lockheed Martin Corp. (NYSE:LMT) has emerged as the sector’s anchor, converting its record $230.4 billion backlog into profitable growth and securing new Pentagon contracts that reinforce its leadership in advanced defense systems.
Lockheed Martin Corp. (NYSE:LMT) shares surged more than 10% on July 23 after the company reported strong Q2 2026 earnings and secured additional business with the Pentagon. The stock is up more than 15% since the beginning of the year. This rally shows investor confidence in the company’s ability to convert its massive backlog into profitable growth, even amid defense budget politics.
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Lockheed has won $67.7 million from the Pentagon for a new pair of contracts. One of the contracts covers US Navy submarine systems upgrades and is worth up to $44.6 million. The other covers F-35 fighter jet maintenance depots for allied nations and is worth $23.1 million.
Defense Spending Tailwinds Support the Sector
Lockheed’s latest Pentagon contract awards arrive as defense spending continues to rise. Amid persistent geopolitical tensions, countries are moving to upgrade their defense capabilities and replenish weapon inventories.
For the US, in particular, the military support for Ukraine and the operation in Iran are draining its weapons. As a result, the Pentagon is seeking to replenish its stockpile of missiles, rockets, and other weapons quickly. The Trump administration has also proposed a record $1.5 trillion military budget for fiscal 2027. NATO members are also expanding their defense budgets, with the allies committing to spending 5% of their GDP on defense by 2035.
Against that backdrop, Lockheed and other major contractors are seeing strong demand for advanced defense systems.
Strong Earnings Reinforce Long-Term Growth Visibility
Lockheed Martin Corp. (NYSE:LMT) delivered Q2 earnings that far exceeded Wall Street expectations and raised its full-year outlook. Revenue increased 11% year over year to $20.1 billion, while earnings reached $7.94 per share. Free cash flow also rebounded sharply to $2.9 billion from negative territory the prior year.
On the back of the solid Q2 results, Lockheed raised its full-year 2026 guidance. It now expects revenue to come between $79.75 billion and $81.75 billion. The previous guidance anticipated revenue in the band of $77.5 billion to $80 billion.
One of the clearest indicators of booming business for Lockheed is its rapidly expanding backlog. The company exited Q2 with a record $230.4 billion in order backlog, up from $166.5 billion a year ago, substantially larger than Northrop Grumman Corp. (NYSE:NOC)’s backlog, which also recently hit a record $104.7 billion. The growing order book provides multi-year revenue visibility.
How Lockheed Compares With Northrop Grumman
Even after the recent rally, Lockheed continues to offer competitive valuation multiples within the defense sector. The stock trades at a forward PE ratio of 18.87x, compared to Northrop Grumman’s 19.08x.
Income investors also receive a higher cash return. Lockheed currently offers a 2.43% dividend yield, compared with 1.85% for Northrop.
Lockheed’s order book is also substantially larger than that of Northrop. Its larger backlog provides greater long-term earnings visibility.
What Could Shape Lockheed’s Growth Outlook
Exposure to major global defense customers and a diversified portfolio are some of Lockheed’s strengths. These position the company well to benefit from rising defense spending. For instance, the Pentagon’s push to replenish missile stockpiles and expanding military budgets among NATO allies support Lockheed’s long-term growth outlook.
At the same time, investors should keep an eye on several risks. Defense budget politics, fixed price contract exposure, supply-chain constraints, and labor shortages could slow Lockheed’s progress. In addition, geopolitical tensions fueling defense spending today could also disrupt the industry and weigh on defense contractors’ financial performance.
How Hedge Funds and Short Sellers View Lockheed
More elite investors moved into Lockheed during Q1. Some 83 hedge funds held positions in Lockheed at the end of Q1, up sharply from 59 in the previous quarter. In contrast, 62 hedge funds owned Northrop Grumman shares, unchanged from the prior quarter. The trend suggests that elite investors are becoming more confident in Lockheed’s outlook.
AQR Capital Management, led by Cliff Asness, emerged as the largest hedge fund shareholder of Lockheed in Q1 2026 with 1,507,786 shares valued at $911.3 million, after boosting its stake by 17% during the quarter. Meanwhile, Two Sigma Advisors, managed by John Overdeck and David Siegel, ranked as the second‑largest holder, reporting 1,349,172 shares worth $815.4 million, reflecting an 11% increase in its position.
Bearish bets on defense stocks remain low, with Lockheed’s short interest standing at 1.52% as of the end of June. That represents 3.5 million shares with 2.1 days to cover. Northrop carries a short interest of 1.66%, representing 2.6 million shares with 2 days to cover.
Investor Takeaway
Amid the expanding defense budgets, Lockheed Martin’s strong earnings, record backlog, and improving hedge fund interest make it a compelling defense stock to watch.
There is no doubt that execution risks and future budget negotiations can disrupt the scene for defense companies. But Lockheed compares favorably with industry peers thanks to its global defense exposure and stronger order book.
While we acknowledge the risk and potential of LMT as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than LMT and that has 10,000% upside potential, check out our report about this cheapest AI stock.
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