The automatic U.S. budget cuts known as “sequestration” went into effect on March 1, but the sky has not fallen as far as investors and traders are concerned. There is no pure defense stock-price index but shares of the largest U.S. defense primes have outperformed both the S&P 500 and Dow Jones Industrial Average since March 1. Small and mid-size stocks have also performed well and even the major U.S. defense services contractors—Booz Allen, CACI, ManTech and SAIC—have seen their shares appreciate more than broader market indices.

As he was recently discussing the pivot of U.S. strategic emphasis to the Asia-Pacific region, Deputy Defense Secretary Ashton Carter repeated an assertion that the U.S. spends more on defense “than the next 16 largest militaries combined.” While Carter's talking point is more or less technically correct, such a comparison does not indicate what an appropriate level of spending should be. A more useful way to think about U.S.

For portions of the U.S. defense industry, China's military rise is viewed as an opportunity. As Beijing develops and fields more advanced defenses, the U.S. plans to respond with new spending on air, naval, missile defense and cyberforces. Indeed, this was underscored by the U.S. strategy pivot to Asia that was unveiled in January. But China's rise could also pose three challenges to U.S. defense companies in ways that may not be currently appreciated or understood.