This sector is 'poised for a big, beautiful year': Truist

Investing.com -- The U.S. government services sector is “poised for a big, beautiful year,” Truist Securities analysts say, as they look ahead to a more supportive funding and contracting backdrop emerging in 2026 and extending into next year.

While near-term conditions remain uneven, the medium-term setup is improving, particularly for companies with heavier exposure to defense and intelligence work, according to analysts led by Tobey Sommer.

A central pillar of Truist’s outlook is the expected impact of the One Big Beautiful Bill Act (OBBBA). The analysts expect funding tied to the legislation to begin flowing through the system over the course of 2026, improving business-to-business dynamics and visibility on contract awards.

They believe this could lead to a pickup in bookings activity during the summer and fall of 2026, which would then feed into stronger growth in subsequent quarters.

Truist estimates this could translate into “2–4 pts faster organic growth in subsequent quarters for defense & intel,” with defense-focused contractors, such as CACI (NYSE: CACI), Parsons (NYSE: PSN), and Leidos (NYSE: LDOS), seen as the primary beneficiaries.

At the same time, the brokerage remains cautious on civil-exposed parts of the sector. Analysts note that DOGE-related actions and procurement challenges have “meaningfully hurt organic growth rates,” particularly for companies with higher exposure to federal civilian spending.

Several civil-oriented names, such as ICFI (NASDAQ: ICFI), Booz Allen (NYSE: BAH), SAIC (NASDAQ: SAIC), and KBR (NYSE: KBR), have posted negative organic growth in recent quarters, a trend Truist does not expect to reverse quickly.

The analysts also flag the risk that a push for higher defense spending could increase pressure on civil budgets, pointing to deficit concerns and bond market discipline as potential constraints.

In addition, the team points to near-term booking headwinds tied to the recent government shutdown. Management teams across the sector have described a slower procurement environment following the shutdown, and analysts note that the fourth quarter is historically the weakest period for bookings even in normal conditions.

But while the companies expect some pressure on late-2025 bookings, they view the impact as temporary, with limited implications for 2026 expectations, analysts said.

Within the group, Truist made several adjustments. Most notably, it downgraded V2X to Hold after the stock significantly outperformed peers, rising roughly 20% over the past month. Analysts said upside from current levels appears limited and argued that 2026 Street estimates may be “slightly ambitious.”

As an alternative, they prefer peer Amentum given its stronger long-term nuclear exposure.

Truist also cut its estimates for Parsons, lowering its 2026 and 2027 revenue forecasts by about 2% to 3% to reflect headwinds tied to confidential contract revenue. Analysts believe Street models are too optimistic, with revenue estimates roughly $200 million too high and EBITDA about $25 million above what it expects initial guidance to imply.

CACI remains Truist’s preferred pick in the sector, citing its software-focused model, higher exposure to reconciliation funding and administration priorities, and a stronger expected growth trajectory than peers.

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