Defense stocks are surging to the forefront of Citi's aerospace and defense rankings as Q1 earnings season begins, driven by escalating global military budgets and manageable tariff risks, analysts said Thursday.

Citi highlighted Northrop Grumman (NOC), Huntington Ingalls (HII, Financial), RTX (RTX, Financial), and Lockheed Martin (LMT, Financial) among its top picks, citing a “supportive spending environment” as the U.S. approaches a $1 trillion defense budget and European allies ramp up investments.

“Global defense spending is accelerating, with weapons systems poised to outpace overall budget growth,” said Citi analyst Jason Gursky. He noted minimal tariff exposure for defense firms, contrasting with business jet manufacturers like General Dynamics (GD, Financial) and Textron (TXT, Financial), which face near-term cost pressures due to supply chain ties to Canada and Mexico. Suppliers Curtiss-Wright (CW), GE (GE, Financial), and TransDigm (TDG, Financial) may see margin squeezes but could reprice contracts by 2028.

Commercial aerospace giants Boeing (BA, Financial) and Airbus (EADSY, Financial) remain resilient, backed by record backlogs as airlines prioritize fuel-efficient fleets. Gursky expects Q1 results to align with forecasts, as tariff impacts emerged too late to affect earnings.

Defense earnings may underwhelm near-term due to delayed post-election contract awards, but Citi anticipates mid-single-digit growth in the fiscal 2026 budget request due mid-May.

“Weapons spending could exceed expectations—a catalyst not yet priced in,” Gursky added. Other top defense picks include KBR (KRMN, Financial), L3Harris (LHX, Financial), Leidos (LDOS, Financial), SAIC (SAIC, Financial), V2X (VVX, Financial), and General Dynamics (GD, Financial).