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U.S. President Donald Trump ignited a sharp selloff across the defense industry on Wednesday after publicly condemning major contractors for prioritizing shareholder payouts over production capacity and equipment maintenance. The sector dropped 1-3% in response to his warnings of potential restrictions on executive compensation and capital allocation practices.
In a detailed post on his Truth Social platform, Trump accused leading defense firms of failing to build military equipment "fast enough" while funneling resources into dividends and stock buybacks rather than operational improvements. He described the situation as detrimental to national security, calling for companies to construct modern production facilities without additional taxpayer funding.
The market reaction was immediate, with investors bracing for potential policy changes that could fundamentally reshape how defense contractors manage their finances and reward shareholders.
Trump's most specific proposal involves capping executive compensation at $5 million annually, which he characterized as "a mere fraction of what they are making now." The restriction would apply to contractors experiencing delivery delays and production inefficiencies, which Trump labeled "exorbitant and unjustifiable" given current performance levels.
The proposed ceiling stands in stark contrast to current compensation packages across the industry. Lockheed Martin's chief executive earned over $22 million in total compensation in recent years, while leaders at Northrop Grumman and General Dynamics have received packages ranging from $15 million to $25 million, including bonuses and stock options.
The pay cap concept builds on draft executive orders from Dec. 2025 that aimed to link compensation restrictions to contract performance metrics. Implementation could occur through an executive order that ties compliance to eligibility for future Pentagon contracts under the 2026 National Defense Authorization Act, which allocates $901 billion and emphasizes domestic manufacturing.
Taxpayer advocacy groups have praised the proposal as a step toward accountability, while critics warn it could deter top talent from the defense sector. As of now, the cap remains a threat rather than enacted policy, though it has already intensified scrutiny on executive perks across the industry.
RTX Corporation, the entity formed through Raytheon's merger with United Technologies, experienced a relatively modest decline compared to its peers. RTX shares fell approximately 0.01% to 1.4% on January 7, closing around $187.74 down from the previous day's $190.40.
The company's diversified portfolio, which includes commercial aerospace alongside defense operations, likely provided some insulation against the pure defense-sector volatility that hit competitors harder. RTX maintains involvement in key Pentagon programs including missile systems and air traffic control modernization, areas where Trump has previously indicated potential contracts.
However, the company faces exposure to Trump's core complaints. RTX has experienced production delays in hypersonic weapons and radar systems, issues that align with the president's broader grievances about contractor performance. Restrictions on dividends, which totaled over $2 billion for RTX in 2025, and stock buybacks could strain the company's capital returns strategy that has attracted investors.
RTX's chief executive compensation of approximately $20 million would face substantial cuts under the proposed $5 million cap, potentially affecting executive morale and retention. Despite the immediate pressure, some analysts view the dip as a buying opportunity, citing RTX's potential role in addressing emerging threats that could boost demand if Trump escalates military interventions.
Lockheed Martin and Northrop Grumman absorbed the heaviest blows, with declines of 1.7-3% and 2-3% respectively. General Dynamics shares fell about 2-2.4%, closing at $352.06 after reaching $360.71 the prior day. The submarine and combat vehicle manufacturer has faced scrutiny over delivery delays, making it particularly vulnerable to Trump's production mandates.
L3Harris Technologies experienced a smaller decline of 0.8-1%, closing at $312.07. The communications and electronics specialist's focus on technology rather than heavy manufacturing may have softened the impact, though potential buyback restrictions could still affect its shareholder-friendly policies.
Boeing's defense division saw a slight dip of 0.5-1% amid the sector selloff, though the aerospace giant received some offsetting support from unrelated positive developments regarding tariffs and Venezuela. Boeing's existing commercial aviation challenges amplified its sensitivity to any defense policy shifts.
The declines reflect widespread investor concern over potential reductions in capital returns, as defense firms have historically relied on dividends and stock buybacks totaling billions annually to attract investment capital. Exchange-traded funds such as iShares U.S. Aerospace & Defense also experienced downward pressure, though some analysts suggest these could rebound if geopolitical tensions escalate and drive increased defense spending.
While no formal executive order has been issued, reports indicate the Trump administration has been developing such measures to penalize underperforming contractors. The president's comments reflect ongoing frustrations with defense industry performance, including production bottlenecks that have persisted amid heightened global tensions.
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