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Defense Budget Expansion: 3 Mid-Cap Names in a Sweet Spot
Authored by Chris Markoch. Originally Published: 4/20/2026.
Key Points
- A proposed surge in defense spending is accelerating demand for next-generation military technologies.
- Mid-cap defense companies offer growth potential as they gain contracts and visibility.
- Autonomous systems, cybersecurity, and shipbuilding are key themes driving long-term upside.
- Special Report: Elon Musk’s $1 Quadrillion AI IPO
In early April, the Trump administration proposed boosting defense spending to $1.5 trillion for 2027. It was the largest such request in decades and would represent a roughly 44% increase for the Pentagon. Although the move is easy to link to the Iran war, the administration signaled its desire for a larger defense budget before the conflict began.
The rationale is both practical and strategic: today’s military infrastructure is not optimally configured for the nature of future warfare. Preparing for that future will require greater investment in next-generation shipbuilding and in autonomous defense solutions.
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That is a key reason why defense and aerospace stocks have led the market higher in 2026, including major names like Lockheed Martin (NYSE: LMT) and Northrop Grumman (NYSE: NOC). There’s also growing opportunity among mid-cap defense names with less visibility than the large index components, many of which are still being repriced.
Kratos Defense: A Pure Play on Autonomous Warfare Growth
The push for unmanned autonomous technology in defense will require both offensive and defensive solutions. Kratos Defense & Security Solutions (NASDAQ: KTOS) addresses both areas.
On the defensive side, Kratos is one of the largest producers of counter-unmanned aerial systems (C-UAS). That market is projected to grow from about $6.64 billion in 2025 to roughly $20.31 billion by 2030, a compound annual growth rate near 25%. In March and April 2026, Kratos announced contracts that together exceeded one-third of its fiscal 2025 revenue of $1.35 billion.
On the offensive side, Kratos’ XQ-58 Valkyrie has been adopted by the U.S. Marine Corps, which continues to procure additional Valkyries. Continued purchases could move Kratos closer to becoming a program of record for the Department of Defense.
KTOS is roughly 40% below its year-to-date high, as institutional selling has outpaced buying. Still, analysts are projecting about 38% earnings growth and have been raising price targets. That makes this a more attractive entry point for a stock that is still up more than 100% over the past 12 months.
Leidos: Software and Cybersecurity Powering Modern Defense
The need for offensive and defensive solutions extends to software as well as hardware. Leidos (NYSE: LDOS) represents the software and systems side of the modern defense industry. The company focuses on modernizing U.S. government IT systems, cybersecurity, engineering, and professional services, offering capabilities in IT, analytics, and mission-critical systems.
In 2025, Leidos won a multi-year contract with the U.S. Transportation Security Administration. That contract—and a six-week government shutdown in 2025—contributed to the miss in the company’s Q4 2025 earnings report.
Looking ahead, management has pointed to the Golden Dome project as a potential catalyst in 2026 and beyond. The company is expected to triple capital expenditures to $350 million to expand production capacity and upgrade classified facilities—an investment that seems prudent but comes at a time when LDOS is about 20% below its YTD high amid concerns that advances in artificial intelligence could affect cybersecurity firms.
Analysts have trimmed some targets, but the consensus price target for LDOS is $208.27, which implies more than a 30% upside from the stock’s mid-April price.
Huntington Ingalls: Shipbuilding Strength Meets Next-Gen Tech
Huntington Ingalls (NYSE: HII) combines traditional shipbuilding expertise with investments in next-generation technologies. Its shipbuilding capabilities align with America’s Maritime Action Plan (MAP), a broad initiative to update and expand U.S. shipbuilding capacity.
Even before MAP, Huntington Ingalls had forecast up to $50 billion in new government contracts over the next 24 months. For context, the company generated just over $12 billion in revenue in 2025.
Huntington Ingalls is also growing its Mission Technologies segment, which includes AI, cyber defense, and unmanned systems. That segment accounted for about a quarter of revenue in 2025 and is expected to grow.
HII is the momentum pick in this group. The stock is up about 15% in 2026 and is trading slightly above its consensus price target of $383.22. Analysts are raising targets ahead of the company’s May 7 earnings report, suggesting there may be additional upside as institutional interest grows.
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