Defense Budget Expansion: 3 Mid-Cap Names in a Sweet Spot

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.

In early April, the Trump administration proposed an increase in defense spending to $1.5 trillion for 2027. This was the largest such request in decades and would mark a 44% increase for the Pentagon. At first glance, it would be easy to connect this request to the Iran war. However, the administration floated its desire for a larger defense budget before the conflict began.

The reason is practical as well as strategic: The current military infrastructure is not well-suited for the nature of future warfare—or at least not as well-suited as it could be. Preparing it will require more investment in next-generation shipbuilding as well as in autonomous defense solutions.

This is a principal reason why defense and aerospace stocks have led the market higher in 2026, including big names like Lockheed Martin NYSE: LMT and Northrop Grumman (NYSE: NOC). However, there’s a growing opportunity in mid-cap stocks that have less visibility than their major index counterparts, which are still being repriced.

Kratos Defense: A Pure Play on Autonomous Warfare Growth 

The pursuit of unmanned autonomous technology in the defense sector will require both offensive and defensive solutions. Kratos Defense & Security Solutions NASDAQ: KTOS covers both areas.  

On the defensive side, Kratos is one of the largest producers of counter-unmanned aerial systems, or C-UAS. This is a market that’s projected to grow from approximately $6.64 billion in 2025 to roughly $20.31 billion by 2030, representing a compound annual growth rate of about 25%. In March and April 2026, the company announced contracts totaling more than one-third of its fiscal year 2025 (FY2025) revenue of $1.35 billion. 

On the offensive front, Kratos’ XQ-58 Valkyrie has been adopted by the U.S. Marine Corps, which continues to procure more Valkyries and could move Kratos closer to being a program of record for the Department of Defense.

KTOS is down about 40% from its year-to-date (YTD) high, with institutional selling outpacing buying. However, analysts are projecting earnings growth of around 38% and are continuing to raise their price targets. That means investors are getting a better entry point for a stock that is still up more than 100% in the last 12 months.

Leidos: Software and Cybersecurity Powering Modern Defense

The need to find offensive and defensive solutions applies to software as well as hardware. Leidos NYSE: LDOS represents the software side of the new-age defense industry. The company’s work focuses on modernizing U.S. government IT systems, cybersecurity, engineering, and professional services, with a broader range of offerings in IT, analytics, and mission-critical systems.

In 2025, Leidos was awarded a multi-year contract with the U.S. Transportation Security Administration. Investors saw the downside of that contract in the company’s Q4 2025 earnings report.

Leidos missed revenue expectations due in large part to the six-week government shutdown in 2025. But looking forward, management has pointed to the Golden Dome project as a potential catalyst in 2026 and beyond. The company may need that tailwind since it’s expected to triple its capital expenditures to $350 million. On the one hand, that seems like a prudent investment to expand production capacity and upgrade classified facilities.

However, it comes at a time when LDOS is down 20% from its YTD high over concerns that enhancements in artificial intelligence (AI) will affect cybersecurity companies. Analysts have been lowering their price targets. However, the consensus price target for LDOS is $208.27, over a 30% increase from the stock’s price in mid-April.

Huntington Ingalls: Shipbuilding Strength Meets Next-Gen Tech

Huntington Ingalls NYSE: HII is a blend of old school and new-age technology. The company is best known for shipbuilding. That expertise dovetails nicely with the America’s Maritime Action Plan (MAP) initiative—a sweeping blueprint to update and expand U.S. shipbuilding capacity.

Even before the MAP announcement, Huntington Ingalls was forecasting up to $50 billion in new government contracts in the next 24 months. To put that into perspective, the company generated just over $12 billion in 2025.

However, Huntington Ingalls is developing a growing Mission Technologies Segment, including AI, cyber defense, and unmanned systems. This accounted for about a quarter of the company’s revenue in 2025 and is expected to increase in coming years.

HII is the momentum pick of this group. The stock is up about 15% in 2026 and is trading slightly above its consensus price target of $383.22. But analysts are raising their price targets before the company’s May 7 earnings report. That means there’s likely more upside for the stock that’s seeing significant interest from institutional investors.