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Recent messages on social media platform X about federal spending, civilian workforce cuts, the Lockheed Martin F-35 and autonomous systems are a pointed reminder of uncertainties that face the defense sector in 2025-26. As a general rule, markets dislike uncertainty. It may take months for things to settle down. Key issues to watch are who President-elect Donald Trump nominates for senior positions in the Defense Department, how quickly they are confirmed by the Senate, what Congress does with the fiscal 2025 defense budget and the broader backdrop of the new administration’s trade, tariff and other policies.
It is quite unlikely that contractors developed two alternative strategic plans for 2025 and beyond before the presidential election—one assuming Vice President Kamala Harris won the election with split party control of Congress and another assuming a Republican sweep. It is extremely unlikely that any contractor’s plan mapped out exactly how Elon Musk’s and Vivek Ramaswamy’s proposed so-called Department of Government Efficiency (DOGE) could reshape defense and federal spending. To draw an analogy from American football, aerospace and defense leaders that entered 2025 with a carefully drawn-up plan are going to be calling a lot of plays at the line of scrimmage.
That said, it is not as if 2025 and beyond are blank canvases. There are nine questions contractors can consider to define a new working environment for the coming years.
1) What can realistically be expected from the DOGE, and how can contractors provide input to find savings and efficiencies? The idea that 75% of the federal civilian workforce can be cut is going to run headlong into the facts: 65% of those employees work at the Pentagon and the Veterans Affairs and Homeland Security departments, and 80% are employed outside the Washington metropolitan area.
2) What will be the priorities of new Pentagon civilian leadership? Trump says he wants to root out “woke” and other social policies, which would result in one set of outcomes. But if his administration instead focuses on building U.S. defense capacities, working with allies and building deterrence, that suggests another set of outcomes.
3) How much funding will the Defense Department receive? A base case could be that the Pentagon’s top line will grow a bit faster than inflation. A best case could be that it is set on a path toward 6% of GDP by 2028, which would imply $1.8 trillion. That seems improbable. Deficit hawks and the DOGE could keep Pentagon spending in check, possibly with no real growth.
4) How much will the Defense Department rebalance investment between crewed systems and uncrewed, attritable, autonomous systems? The subtext to this question is how much influence relatively new defense technology entrants have over Pentagon investment. Will major crewed programs—such as the F-35, Virginia-class submarines and existing weapons in service—be cut to fund swarms of drones?
5) How will tariff, trade and international policies shape inflation and U.S. defense exports? If tariff threats prove to be a negotiating tool, and there is more bluster than actual implementation, their effect may be benign or even positive for U.S. defense exports. If, however, other countries retaliate, resulting in higher inflation, a strong U.S. dollar (which would make U.S. defense exports more expensive) and investment favoring their own or regional contractors in Europe and Asia, U.S. firms could experience negative outcomes.
These factors also obviously matter a lot for the health and outlook of the U.S. commercial aerospace sector, particularly if China retaliates by targeting U.S. exports or interrupting supply networks.
6) What’s the outlook for strategic nuclear weapons programs and missile defense? The first Trump administration included efforts to bring China into strategic arms limitation talks, but China was having none of it. The New START Treaty with Russia ends in 2026. Sentinel ICBM costs will matter for U.S. Air Force spending, and if Trump moves ahead with an “Iron Dome in the sky” for the U.S., the nuclear postures of China and Russia could change.
7) What new security concerns could emerge in 2025-26 that would take U.S. defense spending in different directions from the current main narratives? The 2001 Quadrennial Defense Review was all but completed when the Sept. 11, 2001, terrorist attacks occurred. China is now the dominant factor shaping U.S. defense. Could security issues in the Middle East or Latin America take U.S. defense posture in a different direction, and if so, what could change?
8) Will there be more relaxed views on consolidation and mergers and acquisitions in defense? Maybe the Trump administration will bring different views on combinations among the largest contractors. What if SpaceX or another defense entrant or activist investor makes an offer to buy a major contractor?
9) How will U.S. fiscal capacity change in 2025-26? If federal deficits can be reduced to 3% of GDP by 2028, that might be a long-term positive, but if deficits increase, the outlook for defense could diminish.
The views expressed are not necessarily those of Aviation Week.
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