Elon Musk has been set loose in the Pentagon, wielding an axe and slashing spending. Last week, as you may have heard, President Trump expressed a desire to "cut our military budget in half," utilizing Musk and his merry band of Department of Government Efficiency (DOGE) price cutters to get the job done. And one week later, details of how the cuts might happen, itemized by year, are starting to emerge.

On Wednesday, newly installed Secretary of Defense Pete Hegseth reportedly told the Pentagon it needs to find $50 billion worth of programs to cut next year. But the cuts won't end there. As CBS reports, the Trump administration intends to keep cutting defense spending at an average rate of 8% per year, over the next five years.

Working off the fiscal 2025 defense budget of $895 billion (or as the President puts it, "almost $1 trillion"), that would reduce the Pentagon's budget to $590 billion by 2030, a total reduction of 34%. It's not exactly 50%. 

But it's more than enough to make investors in defense stocks seriously worried.

Image source: Getty Images.

Defense stocks take it on the chin

Some of America's biggest and best-known defense stocks reacted immediately to the news, and not in a good way. Since Trump first hinted that cuts are coming, Textron (TXT -0.12%) stock is off barely 0.3%. However:

• Boeing (BA -2.06%) stock is down 1.5%.
• Lockheed Martin (LMT 1.01%) shares are off 2%.
• RTX Corporation (RTX -0.96%) shares are down 2.1%.
• General Dynamics (GD -1.27%) stock has lost 2.7%
• L3Harris Technologies (LHX 0.91%) stock is down 3%.
• Leidos (LDOS -2.48%) stock is down 5.1%.
• Northrop Grumman (NOC 2.25%) stock has lost 8.5%.
• And Kratos Defense & Security Solutions (KTOS -2.69%) has crashed 15.5%.

Conversely, Huntington Ingalls (HII -4.27%) shares are up 7.3%.

By the way, as far back as October 2024, before Trump was even elected, I warned that all of these stocks cost too much and were due for a fall. In the months since, I've also highlighted Huntington Ingalls as one of a very few defense stocks that might be getting cheap enough to buy. But you invested in many of the others. Well, you were warned.

What defense cuts mean for defense stocks

Now, President Trump's bad news for the Pentagon may not be quite as bad as it seems for all of these defense stocks. Part of Secretary of Defense Hegseth's plan seems to be to cut spending in some areas of the Pentagon in order to free up funds for other programs the President prefers, such as his much vaunted "Iron Dome for America" missile defense system.

Viewed optimistically, this might be positive, or at worst neutral, for missile technology-focused defense stocks such as RTX. At the same time, both Trump and Elon Musk are on record talking down the usefulness of products such as Lockheed Martin's F-35 piloted fighter jet and talking up the advantages of unmanned aerial vehicles:

Meanwhile, some idiots are still building manned fighter jets like the F-35 🗑️ 🫠pic.twitter.com/4JX27qcxz1

-- Elon Musk (@elonmusk) November 24, 2024

Again, viewed optimistically, this could suggest brighter days ahead for companies that specialize in producing military drones. That could be good news for Boeing, maker of the Navy's MQ-25 Stingray drone, and could mean that investors made a big mistake selling off drone specialist Kratos Defense.

Image source: Getty Images.

New opportunities for defense investors

Personally, what I'm most optimistic about (and I'll admit right away I'm probably wrong about this) is the chance that a shaken-up Department of Defense might trade in a few of its more expensive weapons programs for one of the cheaper, more innovative products offered to and then ignored by the Pentagon in recent years.

Here I'm talking about things like:

• Cheap drone aircraft carriers, as opposed to $15 billion Ford-class supercarriers that take 12 years to build.
• Budget-friendly fighter jets, such as Textron's innovative Scorpion jet.
• And cutting-edge concepts like Howe & Howe Technologies' "Ripsaw" remotely operated tank (now also owned by Textron) and Juliet Marine Systems' "Ghost" stealth warship.

In a perfect world, a leaner, meaner Pentagon budget would open up the potential for the U.S. military to become a leaner, meaner fighting machine by employing some of these technologies to deter aggression even as they discourage overspending. Even in a perfect world, it might permit more of the private defense contractors that invent these products to go public so we can invest in them.

If President Trump and DOGE play their cards right, things could still play out that way. Fingers crossed.