Shares of Palantir (PLTR 3.35%) are surging on Tuesday. The stock gained 1.7% as of 1:30 p.m. ET but was up as much as 10.6% earlier in the day. The rise comes as the S&P 500 gained 1.4% and the Nasdaq Composite saw significant volatility.

President Donald Trump's pledge of a historic trillion-dollar defense budget is fueling investor enthusiasm for the government-focused AI company and defense contractor.

Trump wants $1 trillion for defense

Palantir shares jumped after President Donald Trump and Defense Secretary Pete Hegseth announced plans for a first-ever $1 trillion Department of Defense budget. During a press event on Monday, Trump stated the upcoming budget would be "in the vicinity" of $1 trillion. That's a big jump from the $892 billion Congress allocated this year.

Defense Secretary Hegseth was even more explicit, posting on X that "COMING SOON: the first TRILLION dollar @DeptofDefense budget," adding that they "intend to spend every taxpayer dollar wisely -- on lethality and readiness."

Palantir could benefit

While Palantir has significant commercial operations, a major contributor to its bottom line is the U.S. DOD. The news that the DOD budget would not see its budget cut -- as Trump had indicated earlier this year -- but would actually grow could mean more contracts for Palantir and other contractors.

Still, shares of Palantir -- even after a 35% decline over the past few months -- are trading at an insane multiple. Its price-to-earnings ratio is still above 400. That is absurdly high and anything less than perfection from the company will spell trouble for investors.