Trump Calls For Increased NATO Military Spending: Defense Contractors Stand To Benefit

President Donald Trump has called for NATO members to significantly increase their spending on defense, suggesting a target of 5% of gross domestic product to go toward military spending. 

What To Know: Trump reiterated the 5% of GDP spending goal on Monday following his inauguration, according to a Reuters report. The current spending goal is set at 2% and eight NATO member states do not meet the current goal. 

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Poland currently spends about 4.1% of its GDP on military and defense, the highest of any NATO member. Polish Prime Minister Donald Tusk supported Trump's call for increased defense spending in a speech to the lawmakers of the European Parliament on Wednesday. 

“We shouldn’t be irritated. We shouldn’t be appalled,” Tusk told lawmakers of the European Parliament. “Some think it’s extravagant or it is a brutal or malicious warning.”

Tusk told the Parliament that Russia poses an existential threat to the EU. 

“I would like to tell you that this is a time when Europe cannot afford to save on security,” Tusk said. 

Why It Matters: Many analysts expect increased defense spending under the new Trump administration and increased spending targets for NATO members would add to the likelihood of benefits for military and defense contractors like RTX Corp. (NYSE:RTX) and General Dynamics Corp. (NYSE:GD). 

Truist Securities analyst Michael Ciarmoli recently initiated coverage on Lockheed Martin Corp. (NYSE:LMT) and Northrop Grumman Corp. (NYSE:NOC) with Buy ratings and price targets of $579 and $544, respectively. 

Ciarmoli said U.S. and NATO defense budgets will continue to grow and demand for missiles and munitions will be robust.

Additionally, NATO is increasingly using "bulk buys," an aggregated business model to purchase weapons systems and munitions. For example, the NATO Support and Procurement Agency ordered up to 1,000 Patriot Advanced Capability Missiles from MBDA and Raytheon's joint venture Comlog, on behalf of Romania, Spain, Germany and the Netherlands, as reported by DefenseNews. 

These bulk buys could result in large orders and purchases from defense contractors if NATO spending does increase. 

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