Stifel: The US defense budget welcomes the “first year of drones”. 2026 will become an inflection point for the industry. These targets may become winners

The Zhitong Finance App learned that a new research report released by Stifel (Stifel) claims that the US defense industry is at a turning point in an era and predicts that 2026 will be the “year of drones” as the Department of War actively shifts to unmanned systems.

According to this December 15 analytical report, unmanned systems spending is at a “major inflection point,” driven by the “troika” of technological progress, escalating geopolitical threats, and new political will after the government changed earlier this year.

National Defense's “1935 Moment”

Steffel analysts, led by Jonathan Siegman, compared the current defense landscape to the state of manned aircraft in 1935. Just as aviation accounted for very little of the military budget 90 years ago, and then explosive growth became a major structural factor, unmanned systems currently account for only a single-digit percentage of the Ministry of War funding.

According to the report, the “rearmed reorientation” spawned by the German threat in 1935 is different from the current situation. Steffel predicts that unmanned systems will become a “huge growth point in budget share” in the next few years, and their trajectory will be similar to a manned aircraft — by 1955, the latter will eventually account for more than half of the investment account.

Political Drivers and the “Big Beauty Act”

The report highlights significant legislative and executive actions taken throughout 2025, which laid the foundation for this transformation. US President Donald Trump has issued a number of executive orders focusing on modernizing defense procurement and improving US drone capabilities.

Furthermore, the “Big Beauty Act”, which was signed into law on July 4, clearly allocates billions of dollars for drone infrastructure. Key grants include:

* $2.1 billion for medium unmanned surface ships.

* $1.5 billion for loitering ammunition.

* $1.5 billion for unmanned submarines.

* $1.3 billion for anti-drone systems.

Secretary of War Pete Hugseth also issued an order in July focusing on “unleashing the dominance of US military drones,” which Steffel interpreted as “declaring war on the current state of the Pentagon bureaucracy and traditional major contractors.”

Market reshuffle: winners and losers

The report notes that the government aims to rebuild a “mid-tier defense supplier base” and warns that traditional prime contractors may be damaged if they don't adapt. Steffel pointed out that the operating model of traditional enterprises has eliminated manufacturing redundancy, which is contrary to the Ministry of War's new demand for fast and scalable production.

“If we were on the board of a major defense contractor, we would push for 'sacrificial' initiatives to cut dividends or reduce share buybacks to make it clear that we have heard the War Department's call to action,” the analyst wrote.

For investors, Steffel believes that companies with “manufacturing adaptability” and commercial integration capabilities will be long-term winners.

* Business-only preferred stocks: Kratos Defense (KTOS.US), Ondas (ONDS.US), and AeroVironment (AVAV.US).

* Diversified preferred stocks: Teledyne (TDY.US), CACI International (CACI.US), and Leidos (LDOS.US).

Key technical areas

The report details several sub-markets that are expected to grow rapidly:

* Cooperative combat aircraft: These “loyal wingman” drones are designed to work in tandem with F-35 and F-47 fighters. The plan aims to create “expendable scale”, where the loss of an aircraft is a tactical rather than a strategic failure.

* Wandering ammunition: Affected by the war in Ukraine, the US is speeding up procurement of these “kamikaze” drones. Projects like the Army's LASSO are funding Aero Environmental's “spring knife” and other systems.

* Offshore systems: The Navy is moving towards “single mission hulls” to reduce costs. This includes the “MASC” project for surface ships and the “Ghost Shark” project for very large unmanned submarines.

* Anti-drone systems: As the 2026 World Cup is designated as a national special security event, Steffel is expected to see a wave of contracts to protect stadiums and transportation hubs from drone threats, and funding will come from new funding from the Department of Homeland Security.

Steffel said that although many investors think drone stocks are expensive based on current price-earnings ratios, this “ignores that we are in the early stages of a war model shift.” The company expects 2026 to bring a new wave of project awards, which will further strengthen the US domestic industrial base.