Red Cat Holdings is driving the surge in drone stocks on Wall Street Monday.

On Monday, drone stocks surged due to increased retail interest in the sector, fueled by a partnership between Palantir and Red Cat Holdings, as well as recent mysterious sightings in New Jersey that may increase industry funding.

RCAT's stock price increased by more than 25% after news broke that it is collaborating with Palantir to integrate visual navigation software into its drones. RCAT has been the sixth most frequently mentioned stock on Reddit's WallStreetBets page in the past 24 hours, with a surge of over 1,625% in popularity, according to Quiver Quantitative.

On Monday, Donald Trump Jr.-affiliated stocks surged more than 14%, while others added about 4%, and some gained at least 1% each.

The recent sightings of drones in the northeast have sparked interest in the sector and raised national security concerns. However, FBI officials have stated that there is no evidence to suggest that the drones pose a threat to national security or public safety. Officials also clarified on Saturday that many of the sightings were actually manned aircraft that had been mistakenly identified as drones.

The incoming White House administration is viewed as a potential benefit for Wall Street and the U.S. drone industry, with Tesla CEO Elon Musk expected to have a significant impact on President-elect Donald Trump's policies regarding drones.

"According to William Blair analyst Louie DiPalma, local and state law enforcement are increasingly using federal government counter-drone technologies to safeguard stadiums, airports, prisons, and other public spaces. This trend is likely to lead to a significant increase in counter-drone investments by local and state government agencies over the next decade."

The connection of Donald Trump Jr. to Unusual Machines has been viewed by investors as another potential advantage for the industry, as he joined the advisory board of the company in November.

The National Defense Bill in the House, which has recently passed, is also attracting attention in the sector. If approved by the Senate and signed into law, DJI, a China-based company, would be prohibited from selling new drones to the United States.

— CNBC's Yun Li contributed reporting.