President Donald Trump on Monday submitted to Congress a $740 billion national security budget request heavy on investment in updating the nation's nuclear arsenal and providing a substantial boost to research and development, while retiring a number of older Air Force planes. It is a bullish document for defense contractors and their investors, but also provides warning that after years of growth the momentum is starting to fade.
The Pentagon portion of the budget totaled about $705 billion, down 1% from $713 billion a year prior, but the government is seeking to increase spending on nuclear command and control and investment in the new Columbia class nuclear submarine made by General Dynamics (GD 1.35%) and Huntington Ingalls (HII 0.05%). The government also is continuing to invest in Lockheed Martin's (LMT 1.23%) F-35 fighter.
Image source: Getty Images.
The budget also earmarks $2.8 billion to continue development of Northrop Grumman's (NOC 2.84%) B-21 bomber, as well as $1.5 billion for a new intercontinental ballistic missile program that Northrop is the favorite to win.
The Defense Department is undergoing a shift away from focusing on fighting insurgents in the desert and toward potential great power competition against China and Russia. The budget document calls 2021 funding the "irreversible implementation" of the National Defense Strategy, implying that the administration is trying to move programs far enough along that they will not be reversed no matter who wins the presidential election in November.
Overall the administration proposes spending $107 billion on research and development into Lockheed Martin-dominated hypersonics and other future weapons. But its actual funds for purchasing equipment is down year over year, to $137 billion from $144 billion in fiscal 2020.
The budget does call for a number of platforms to be scrapped, a sign that the Pentagon is feeling pressure to make sacrifices as it seeks to find funds for new programs. The Pentagon proposes retiring hundreds of F-15 and F-16 fighters, A-10 attack planes, and B-1 bombers over the next five years.
Overall the Navy's budget would drop slightly year over year, while the Air Force remains steady. The administration did increase the planned purchase of Boeing (BA 1.51%) built KC-46 refueling tankers to 15 from 12, helping to offset planned retirements of older tankers.
Investors should consider the budget proposal the opening of negotiations, and not the final document. Expect Congress to revise the proposal considerably over a long drawn out process. This year's budget is expected to receive even more scrutiny than usual because it is an election year, and because the administration is holding steady on defense while decreasing nondefense discretionary spending.
