2016 Budget Promising For Defense Contractors

The President’s 2016 budget, set to be reviewed by congress next week, is expected to earmark $534 billion for defense spending. The budget projects that the war in Afghanistan and the growing conflict with ISIS will cost around $51 billion, while weapons procurement and research will need nearly $180 billion. 

Over-Budget

As it’s written, the defense budget exceeds the $499 billion spending cap set by congress in 2011 by $35 billion. Current legislation aimed at streamlining the US defense budget and keeping the government deficit down dictates that exceeding the $499 billion cap will trigger automatic budget cuts called sequestration. In 2013, a sequester shut down the government, something that could happen again if lawmakers don’t step in.

An End To Sequestration

However, with Republicans holding the majority in congress, there is a chance that the sequestration legislation could be revised in the coming year. Some members of congress are looking to do away with sequestration and protect the US defense budget for the next ten years, something that would defense an appealing sector for investors.

Who Stands To Gain

The massive spend will benefit large cap defense contractors like Lockheed Martin Corp LMT, Raytheon Company RTN and Northrop Grumman Corporation NOC as the bulk of their revenue comes from the US government.

Companies that specialize in aerospace like Boeing Company BA and Wesco Aircraft Holdings Inc. (NYSE WAIR) could also see a lift later in the year after their latest military offerings go on display in June at the Paris Air Show.