Tesla (NASDAQ:TSLA) CEO Elon Musk's push to slash $1 trillion in federal spending by May could weigh on the U.S. aerospace and defense sectors, UBS analyst Gavin Parsons said in a research note Monday.

Musk, who currently heads the Department of Government Efficiency (DOGE), has already reported $130 billion in savings. Parsons anticipates deeper cuts ahead and says those reductions may hit companies tracked by the iShares U.S. Aerospace & Defense ETF (ITA).

Despite the potential for larger budget cuts, Parsons noted that increased transparency and Musk possibly stepping back from his leadership role could improve investor sentiment in the sector.

Parsons also cautioned that firms involved in federal IT contracts may face a slowdown in order volume during Q1. Science Applications International (SAIC) has already flagged delays and extended timelines due to DOGE-related leadership changes.

Looking ahead to the 2026 federal budget, Parsons highlighted the risk of significant program cuts, including the possible elimination of entire departments, such as the Department of Education. Still, he noted that Congress often restores some funding during negotiations, helping mitigate downside risks.

UBS raised concerns about inconsistencies in DOGE's reported savings. For instance, DOGE claimed a $56 million reduction on a contract with Booz Allen Hamilton (BAH), though government data showed only $41 million in savings. Similar discrepancies were found in contracts tied to the Centers for Disease Control and Prevention and the Commerce Department.

Even so, UBS believes government IT stocks, which are trading roughly 20% below the S&P 500, could see a strong recoverydespite near-term earnings pressure.