(A)Political - January 10th

Good morning everyone,

There’s been a shortage of boredom in D.C. this week. We’re going to find out why!

Trump wants to add $600 billion more to the Defense budget in 2027. Five states have directed a lawsuit against the federal government for payment freezes on Child Care and Family Assistance. Trump has unveiled two levers to lower the cost of housing, the aim to ban institutional investors from buying single family homes and $200 billion in mortgage bonds being purchased by Government Sponsored Entities (GSE’s) Fannie Mae and Freddie Mac.

• Trump: Pentagon Budget Should Be $1.5 Trillion For ‘Dream Military’

• Five States Sue The Federal Government Over Child Care Payment Freeze

• Trump Directs Two Major Pushes For U.S. Housing Affordability

Trump: Pentagon Budget Should Be $1.5 Trillion For ‘Dream Military’

_{By: Atlas}

President Donald Trump said Wednesday the 2027 U.S. military budget should be $1.5 trillion, significantly higher than the $901 billion approved by Congress for 2026, boosting defense stocks but sparking skepticism among budget experts who question how the increase would be financed.

Trump said in a Truth Social post that he made the decision on 2027 military spending "after long and difficult negotiations with Senators, Congressmen, Secretaries, and other Political Representatives... especially in these very troubled and dangerous times."

"This will allow us to build the 'Dream Military' that we have long been entitled to, and, more importantly, that will keep us SAFE and SECURE, regardless of foe," Trump wrote.

The proposed increase would require congressional authorization, which could pose a challenge, although Trump's Republicans, who hold slim majorities in both the Senate and House of Representatives, have shown little appetite for objecting to Trump's spending plans.

Historical context shows serious scale

Byron Callan, a defense analyst with Capital Alpha Partners, said Trump's post raised questions about where the funds would be directed and whether they could even be absorbed by the defense sector.

He said the last time the U.S. Defense Department saw an increase higher than 50% was in 1951 during the Korean War, with even huge surges in military spending under former President Ronald Reagan in 1981 and 1982 amounting to 25% and 20% respectively.

The proposed budget comes days after a U.S. operation to capture former Venezuelan President Nicolás Maduro, which followed months of U.S. military buildup in the Caribbean. The White House has also said that Trump is discussing options for acquiring Greenland, including potential use of the U.S. military. Trump has also deployed U.S. troops to police a number of cities across the country.

On Wednesday, Trump suggested that military operations in Venezuela or the wider region are not over after the capture of Maduro last weekend: "we've knocked out 97% of the drugs coming in by water, and we are going to start now hitting the land."

Budget experts question financing claims

Trump said the extra spending would be covered by revenues generated by tariffs he has imposed on nearly every country and many industrial sectors, and the U.S. would still be able to reduce its debt and send dividend checks to "moderate income" Americans.

The Committee for a Responsible Federal Budget, a nonpartisan think tank, estimated the proposal would cost $5 trillion through 2035, while adding $5.8 trillion to the U.S. debt with interest. It said only half the cost could be covered by tariffs in place now, noting that the Supreme Court could rule that a large set of tariffs were illegal.

The Bipartisan Policy Center estimates that combined tariffs raised $288 billion in 2025, well below Trump's own estimates, which have fluctuated around $600 billion in recent days.

Even if tariff revenues keep coming in, Trump's plans could renew concerns about the sustainability of U.S. finances. Cuts in other parts of government might be an option on paper, but Trump does need congressional support for this. The House of Representatives has just passed legislation on a spending bill that waters down many of Trump's budget cuts, including restoring Obamacare subsidies for three years, as lawmakers seek to avoid another shutdown by the end of the month.

Executive order targets defense contractor practices

The news followed a separate Truth Social post from Trump blasting defense companies for producing weapons too slowly. In it he pledged to block defense contractors from paying dividends or buying back shares until they accelerated production.

Trump signed an executive order directing major defense companies to halt stock buybacks and dividends until they significantly increase investment in production capacity, infrastructure, and weapons development. The order also seeks to cap CEO pay at $5 million annually until new factories are built.

"A limit on capital return is an incremental negative, but the size is manageable," Morgan Stanley analyst Kristine Liwag told clients in response to the executive order. She said that if dividends and buybacks were limited, this could free up billions of dollars in capital to be deployed to investments such as capacity increases or M&A.

JPMorgan analyst Seth Seifman noted, "We wouldn't be surprised to see some upward pressure on capex estimates and perhaps some near-term limitations on share repo expectations when contractors offer their 2026 guidance shortly."

The "potential budget increase would support sustained growth, taking some sting out of the EO," Seifman said, adding that smaller and midcap U.S. defense tech stocks tend not to return cash and so the executive order is less of a focus for them.

Jefferies analyst Sheila Kahyaoglu told clients that Trump's comments about buybacks, dividends and compensation seem "again to be an overreach."

"The industry has been clear that it is ready to invest on clearer demand signals along with procurement reform offering a clear avenue to accelerating development and production ramps," Kahyaoglu said.

Defense stocks surge on spending announcement

In trading after the market closed Wednesday, shares in the biggest defense firms rose on the news as investors bet a surge in spending would bolster profits.

Lockheed Martin was up 6.2%, General Dynamics rose 4.4% and RTX added 3.5%. Northrop Grumman gained 8.3% in premarket trading on Thursday, while Kratos Defense was up 12%.

European defense stocks also rallied. A Goldman Sachs basket of European defense stocks jumped as much as 3.8% and is up 18% year to date.

"Italy's Leonardo tops the Stoxx Europe 600, up 4.2%, followed by Germany's Rheinmetall. The UK's BAE Systems was up about 6%, with Chemring 2.6% higher. About 35% of BAE's sales are to the US Department of Defense, and around 20% of Leonardo's are as well," UBS analyst Tricia Wright said.

Some Asian defense names were also up, with Mitsubishi Heavy rising 2.4% and Bharat Electronics gaining 0.3%.

Wright noted that "the share price gains come amid broader concerns about security stability, as the US discusses aims to acquire Greenland, potentially including the use of the military."

Bloomberg Intelligence analysts Will Lee and George Ferguson said additional spending will likely be focused on shipbuilding, long-range strike capabilities and the Golden Dome missile defense project.

"This likely offsets pressure from Trump's earlier message rebuking defense companies for prioritizing shareholder returns amid delays delivering military equipment to the Pentagon and in maintaining it," they wrote.

Congress is pushing back against further military action. Five Republican senators joined with the Democrats to advance a bill that would limit Trump's ability to take further military action in Venezuela without congressional approval. Several senators have said they plan to introduce similar resolutions for other countries including Greenland, Colombia, Cuba, Mexico and Nigeria.

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