3 Industrial Giants Positioned for Defense-Led Growth

When investors think about infrastructure stocks, many immediately think about artificial intelligence (AI) and with good reason. Many of the leading technology companies are making massive investments in AI that will drive growth for semiconductors and all the other infrastructure required to make data centers operational.

But if you take one step back from that, there are several ways to invest in infrastructure. In some cases, it relates to data centers, but it also touches on key areas that will require investment for the rest of the decade.

One area to consider is industrial stocks, which have been one of the strongest sectors in 2025 but still offer solid upside. It can also mean looking at areas like energy and aerospace/defense, which align with the Trump administration's priorities for onshore American manufacturing.

Digital Infrastructure Meets Defense Potential

Baker Hughes Co. (NASDAQ: BKR) stock is up more than 26% in the last 12 months. With integrated oil companies keeping production at high levels, there is strong demand for the company’s core energy and oilfield services.

However, the company is becoming essential to the emerging areas of digital automation and drone warfare. The Pentagon will have a budget of over $900 billion, which it intends to use in an effort to restructure the military towards unmanned systems (e.g., drones), energy resilience, and digital warfare.

While Baker Hughes doesn’t yet have major defense contracts, its expertise in digital automation and energy resilience could make it a natural partner as the Pentagon pivots toward drones and unmanned systems. Supporting that idea, the company reported that orders for digitally enabled solutions and automation platforms continue to grow.

Investors should note that as the economy expands, Baker Hughes may see growth in multiple business units, which may not be fully priced into the stock.

At around 14.6x earnings, BKR stock is trading at a slight premium to itself and the energy sector. However, it may warrant a premium price if it can show relevance in the digital infrastructure space.

Premium Valuation With Strong Growth Drivers

GE Aerospace (NYSE: GE) is a pure play in the aerospace sector. The company is divided into two business units: Commercial Engines and Services, and Defense and Propulsion Technologies. These two units are highly correlated in terms of their product offerings, and GE Aerospace is seeing increased demand in both the public and private sectors.

One concern that investors may have is that the growth in the defense sector comes with lower margins. At a time when the stock is trading at 37x earnings, a premium to the sector, that’s a fair concern. This is particularly true when the GE stock price is13% above its consensus price target. However, that premium may be justified if defense demand remains robust and analysts continue to revise price targets higher.

However, since the company’s earnings report in mid-July, several analysts have been raising their price targets, including UBS Group, which increased its price target from $300 to $321. That would be a gain of around 19% from its price as of August 25.

A Best-in-Class Industrial for the Long Haul

Caterpillar Inc. (NYSE: CAT) stock is up 19.2% in 2025. That’s below the strong total returns investors have seen in the last five or 10 years. However, there is evidence that CAT stock is still in the must-own category for investors focusing on best-in-class stocks, even at a slight premium.

Skeptics will point out that Caterpillar's tariff-related expenses have eaten into its bottom line for the last two quarters and will continue to do so for the rest of 2025. However, while that’s taking a bite out of its Construction Industries and Resource Industries business, Caterpillar has other levers to pull.

Specifically, the company’s Energy and Transportation unit continues to grow. This area provides engines, turbines and locomotives for industries such as power generation, which will support the digital economy.

Caterpillar is a Dividend Aristocrat that has increased its payout for 30 consecutive years. A payout ratio around 30% makes that dividend, which pays $6.04 per share, very safe.

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