To close out the week we got the U.S. budget proposal, with $163B in planned cuts to support a 13% increase to defense spend (>$1T) that got the entire sector jumping.

We’ve been talking about defense a lot lately, but here’s one more thought: maybe it’s time to start thinking about a capital rotation within defense, from products into services.

We think it makes intuitive sense. All the excitement has been around new spend linked to equipment procurement and projects. That’s been at least partially reflected in valuations.

Once these investments are made and projects get built, the serviceable market should expand and we wouldn’t be surprised to see the gap close.