Wall Street Has the Defense Trade Backwards

Last week was a brutal week for defense contractors — especially European defense contractors.

Rheinmetall fell 18.6% in a single day — its worst single session of the year.

And BAE, Saab, Lockheed Martin, General Dynamics, RTX, and Northrop Grumman all fell with it. 

The trigger for the sell-off was a single headline.

Germany announced it would scale back plans to build six new warships in favor of a smaller fleet supplemented by cheaper, AI-enabled drone platforms.

That was enough for Wall Street to question whether the entire defense build-out — the $600 billion European rearmament, America’s trillion-dollar budgets, the Golden Dome, the global ramp-up in air and missile defense… All of it.

Not me.

I bought the dip.

And I’ll you why…

Germany’s Problem Isn’t America’s

First off, Germany’s strategic situation is fundamentally different from America’s. 

Germany’s biggest military threat is Russia, which sits pretty much on its doorstep.

Simply put, Germany doesn’t need carrier strike groups to defend itself against Russia. It needs tanks, drones, missile defense, and the infrastructure to move forces quickly across European territory.

So if you’re Germany, scaling back warships and pivoting harder into drones makes strategic sense – especially given everything we’ve learned from Ukraine.

But that doesn’t work for America.

America is a global power with strategic interests spanning two oceans.

Our biggest threat is China — separated from us by the entire Pacific Ocean. Drones can’t cover that distance or pose any credible threat to China’s air defense systems.

Consider the Trump administration’s last two military operations in Venezuela and Iran.

Neither of those are possible without long-range naval and air power.

Warships and our carrier strike groups were crucial to both, with the USS Gerald Ford pulling double duty.

That’s why the United States isn’t downsizing its naval capabilities — it’s expanding them.

The U.S. Navy currently operates 11 active carrier strike groups, 24 amphibious assault ships, 67 attack submarines, and roughly 100 surface combatants.

And the Trump administration’s FY27 budget proposal aims to expand that fleet with a 30-year shipbuilding plan that would push the Navy from 296 battle force ships today to nearly 400 by midcentury.

Lockheed Martin, General Dynamics, L3Harris, and especially Huntington Ingalls are all directly positioned to benefit from that effort.

And I’ll tell you something else…

This whole notion that drones will supplant high-end weapons platforms is completely wrong.

Drones Alone Won’t Do It

See that’s the broader misconception driving the recent sell-off in defense stocks.

The conventional wisdom over the past year — driven by Ukraine, Iran, and the rise of drone companies — is that cheap, autonomous drones are going to replace expensive, manned defense platforms.

The F-35 era is done. The age of $80 million fighter jets and $13 billion aircraft carriers is over. The future is autonomous, attritable, and cheap.

To be sure, there is some truth to that. I myself have written about it and profited from that trend. But it’s wildly exaggerated. 

Start with the physical limitations.

Ukraine’s longest-range drone — the FP-5 Flamingo that’s been a genuine game-changer against Russia — has a range of about 3,000 kilometers, or roughly 2,000 miles.

That sounds impressive until you realize it doesn’t get you across the Atlantic.

It doesn’t even get you across the continental United States.

And the FP-5 is on the high end. Most tactical drones have a fraction of that range and a fraction of that payload.

If you want to deliver serious ordnance — like the GBU-57 bunker busters the U.S. used against Iran’s hardened nuclear facilities earlier this year — you need a big plane or a big ship to deploy them.

The GBU-57 weighs 30,000 pounds. No drone in operational service today can carry one.

The only platform that can deliver it is the B-2 stealth bomber, which Northrop Grumman builds. The B-21 Raider that will replace it is also a Northrop Grumman platform.

Furthermore, even when drones do sub in for specific missions, they don’t replace the supply chain that builds them.

The drone swarms the Pentagon is mass-producing rely on Lockheed Martin and L3Harris guidance and communications components.

The missiles those drones launch are still made by RTX.

The autonomous future of warfare isn’t a replacement for the conventional one. It’s a layer that sits on top of it — and the layer underneath still gets paid.

And there’s a third layer that almost nobody on Wall Street is positioning for…

The New High Ground

Space is the final frontier of combat — the new highest ground.

China and Russia are both deploying space-based weapons, as well as ground-fired missiles capable of taking out satellites.

Hence the creation of the U.S. Space Force, which was established to counter these threats and steward America’s space-based assets.

The Golden Dome missile defense initiative is fundamentally a space-based architecture — requiring hundreds of space-based interceptors, sensors, and communication relays to defend the American homeland against hypersonic and ballistic threats.

Northrop Grumman just signed a partnership with Apex earlier this month to demonstrate the first space-based interceptor as part of the Golden Dome program in 2027.

Space is expensive. Space requires deep technical expertise. Space requires the kind of multi-decade R&D investment that only the largest defense primes can sustain.

Again, it’s the defense majors that are building the next-generation orbital infrastructure that everything else depends on — including drones.

The cheap, autonomous drone trade has gotten most of the attention this year — and it deserved it. But the legacy primes that build the carriers, the submarines, the satellites, the space-based interceptors, the bombers that carry the bunker busters, the missiles that arm the drones, and the integrated command systems that everything else runs on still matter.

They matter very much.

That’s why Wall Street was crazy to panic over a single German procurement decision.

Not me.

The trillion-dollar defense buildup, the Golden Dome rollout, the Pacific pivot, and the rearmament of the entire NATO alliance are not slowing down because of one warship contract.

So don’t be silly. Load up.