What is the US defence budget for FY2026?

The US DoD FY2026 budget request totals $961.6B ($848.3B discretionary plus $113.3B mandatory reconciliation), up 11.8% versus FY2025 enacted spending of $860.1B. Broader national defence in the FY2026 request is $1,011.9B, including DoD plus other defence agencies. FY2024 actual total was $909.6B including $67.3B supplemental.

How does NATO defence spending affect European primes?

All 32 NATO Allies met or exceeded the 2% of GDP defence spending target for the first time in 2025. European Allies and Canada increased spending by roughly 20% versus 2024; combined NATO defence expenditure reached 2.3% of GDP (more than USD 574B). The Hague Summit in June 2025 committed Allies to 5% of GDP by 2035 (at least 3.5% core defence plus up to 1.5% defence/security-related). BAE Systems captures European and UK budget tails that US filers access primarily through FMS, the foreign military sales programme run by the US government.

Why does defence-commercial mix change budget beta?

A prime with high government revenue share moves almost one-for-one with defence budget cycles. Lockheed Martin derived ~99.6% of FY2025 revenue from government customers (US and international). RTX split 52% defence / 48% commercial, with commercial backlog ($161B) larger than defence ($107B). RTX budget beta is diluted; LMT budget beta is essentially undiluted.

How do you model defence budget growth into prime revenue?

Budget topline signals demand; it does not forecast revenue directly. Primes lag appropriations by 12-24 months through programme funding and backlog conversion. Book-to-bill above 1.0 confirms orders are running ahead of revenue recognition. Cross-check the prime's government revenue share (LMT ~99.6%, NOC ~100% defence-oriented, GD 76% government, LHX 75% US Government) before applying a budget growth rate to consolidated sales.

Defence Budgets and the Demand Cycle

Educational analysis for professional use. This guide is not investment advice or a recommendation to buy or sell any security, and it is not personalised.

Budget Topline Is the Demand Floor, Not a Revenue Forecast

Defence prime revenue follows government appropriations with a lag. The US DoD topline and NATO European rearmament set the demand cycle; each filer’s government revenue share sets how much of that cycle hits consolidated sales. A 10% DoD increase does not translate to 10% revenue growth at RTX when nearly half the business is commercial aerospace.

The FY2026 request and the 2025 NATO outturn are the worked example below. Company splits come from FY2025 filings.

US DoD Budget Path

Fiscal year	Total	Notes
FY2024 actual	$909.6B	Incl. $67.3B supplemental
FY2025 enacted	$860.1B	Baseline comparison year
FY2026 request	$961.6B	+11.8% vs FY2025 enacted

The FY2026 request breaks into $848.3B discretionary and $113.3B mandatory reconciliation. Broader national defence in the request reaches $1,011.9B when other defence agencies are included.

A +11.8% request is a strong demand signal. Appropriations can trim or reallocate the request through congressional markup, so treat the $961.6B figure as the administration’s planning anchor, not enacted law.

NATO and European Rearmament

NATO’s 2014 Wales pledge set 2% of GDP as the defence spending target. In 2025, all 32 Allies met or exceeded 2% for the first time. European Allies and Canada increased spending by roughly 20% versus 2024. Combined NATO defence expenditure reached 2.3% of GDP, more than USD 574B.

The Hague Summit (June 2025) committed Allies to 5% of GDP by 2035: at least 3.5% on core defence plus up to 1.5% on defence- and security-related spending.

European budget growth matters for BAE Systems, which reports in GBP and derives >90% of revenue from defence-oriented business (no formal defence/commercial split published). BAE FY2025 sales were £30.7B with Group order backlog £83.6B and book-to-bill 1.2x. The BAE profile is the NATO demand read-through in the peer set.

Company	Government / defence share	FY2025 revenue	Budget-beta read
Lockheed Martin	~99.6% government	$75.0B	Near 1:1 with govt cycles
Northrop Grumman	~100% defence-oriented (84% US govt)	$42.0B	Pure defence
L3Harris	75% US Government	$21.9B	Defence-heavy
General Dynamics	76% government / 24% commercial	$52.6B	Gulfstream dilutes
RTX	52% defence / 48% commercial	$88.6B	Dual-stream
BAE Systems	>90% defence-oriented	£30.7B sales	European + US subsidiary

Lockheed Martin derived ~99.6% of FY2025 revenue from government customers: US government $53.4B, international government $21.3B, commercial just $293M. A US budget expansion flows almost directly into LMT’s order pipeline, subject to programme-level allocation (F-35 at 27% of consolidated sales is the concentration lever).

RTX’s revenue splits roughly down the middle between defence and commercial. Its backlog tilts further still: $107B defence against $161B commercial. Pratt & Whitney GTF and Collins commercial aero recoveries can offset defence budget softness in any given year, which is why RTX’s budget beta runs materially lower than LMT’s.

General Dynamics at 76% government includes Gulfstream (25% of revenue, primarily commercial). Submarine work at $12.6B (24% of consolidated sales) ties GD to US Navy capital budgets specifically. The Navy’s own shipbuilding budget is a better guide to that segment than the DoD topline.

From Budget Request to Prime Revenue

The transmission chain runs: budget request → appropriation → programme funding → contract award → backlog → revenue recognition. Typical lag is 12-24 months from appropriation to revenue, longer on new-start development programmes.

Book-to-bill confirms whether awards are running ahead of revenue in FY2025:

Company	FY2025 book-to-bill	Demand signal
RTX	1.56x	Strong order intake
GD	1.5x (1.6x defence)	Backlog building
LHX	1.3x	Above healthy threshold
BAE	1.2x	European + UK intake
LMT	~1.2x (call-cited)	Modest growth, not filed
NOC	1.10x	Healthy, below peer leaders

A rising DoD topline with book-to-bill above 1.0 across the peer set is consistent with a demand-up cycle. The backlog guide has the full ratio ladder and definition footnotes.

Dual-Budget Exposure: US DoD and NATO

Most US filers in the peer set are primarily US DoD-driven, with international government and Foreign Military Sales (FMS) as secondary tails. BAE adds a European budget leg that US-domiciled filers access only through allied FMS or subsidiary revenue.

For a consolidated demand model:

Apply US DoD growth to the US government revenue share of each filer.
Apply NATO European growth to BAE and to international-government lines at LMT, NOC and GD.
Hold commercial segments flat or cycle separately (RTX Collins/Pratt commercial, GD Gulfstream).
Cross-check with book-to-bill. If budget is rising but book-to-bill falls below 0.95, look to programme allocation or competition for the cause; topline demand isn’t the constraint.

Demand Cycles and Earnings Sensitivity

Budget cycles move earnings expectations on pure-play names first. LMT at ~99.6% government and NOC at ~100% defence-oriented carry the least commercial buffer, so a DoD request revision flows almost straight through to their earnings outlook. RTX at 48% commercial and GD at 24% commercial absorb the same budget noise differently, with their commercial segments cushioning or offsetting it.

FCF yield screens should still run on filed FCF and build-date market cap. Budget-growth assumptions don’t belong in that calculation. A rising budget doesn’t strengthen NOC’s FCF conversion rate (79%, in the normal band); the two move independently. The FCF yield guide cross-checks earnings multiples with cash.

LMT is the undiluted US budget-beta case. RTX shows how commercial backlog changes the read. BAE anchors the NATO European leg.