Can Investors Afford to Ignore Defense Stocks in 2026?

Once seen as a niche investment or defensive hedge, defense stocks are increasingly being recognized as a crucial component of a diversified investment portfolio. Today, defense companies aren’t just selling equipment; they’re providing the structural security required for nations to maintain sovereignty in an increasingly unpredictable world and this is reflected in their revenues, earnings, and stock price trajectories.

Looking ahead, there’s a real possibility that defense could be a defining investment theme of 2026. Here’s why investors cannot afford to ignore the sector this year.

Multiple Geopolitical Shocks

Major geopolitical shocks at the start of 2026 have underscored a volatile reality for investors – the global order remains deeply unstable. Already this year, we have seen several major events that have upended the hemispheric status quo and sent ripples through global equity markets.

The first major event was a high-intensity US military intervention in Venezuela in early January. This resulted in the capture of leader Nicolás Maduro, who was swiftly transported to the US to face federal charges of narco-terrorism and drug trafficking. Following Maduro’s capture, the US issued a formal declaration of temporary administrative control over the country and moved to directly manage its oil industry (Venezuela holds the world's largest proven oil reserves¹). This event sent the message that the US is prepared to use military force to assert regional dominance and force regime change and it led to an immediate surge in defense stocks as investors bet on a new era of "gunboat diplomacy."

Building on the momentum of its Venezuela intervention, the US administration then intensified its push to acquire Greenland, a semi-autonomous territory within the Kingdom of Denmark. Greenland contains some of the world’s largest untapped deposits of rare earth elements (which are essential for everything from AI chips and electric vehicle batteries to fighter jets and robotics) so it is seen by the current US administration as a critical national security asset. It is also strategically important for America’s "Golden Dome" project (a multi-layered missile defense shield designed to protect the US) as it is positioned directly on the shortest flight path for missiles traveling between Eurasia and North America. However, while the strategic rationale for US control over Greenland is clear, the move has ignited a profound diplomatic crisis with Denmark and strained the foundational trust of the NATO alliance.

Rather than cooperating with the US, Denmark has led a multinational military response to signal that Greenland is not a defenseless territory, sending over 200 additional soldiers to reinforce its Joint Arctic Command (the unified operational headquarters responsible for the military defense and security of the Kingdom of Denmark’s northern territories). France, Germany, Sweden, the UK, Finland, Norway, and the Netherlands have also sent personnel to the island, signaling that any unilateral US move on Greenland will be met by a united European front. In response, President Trump has announced a 10% blanket tariff on all goods from Denmark and seven other European allies beginning February 1, with the rate set to rise to 25% on June 1 unless a deal for Greenland is finalized². This move has effectively linked territorial acquisition with international trade policy, creating a seismic rift within NATO.

A Defense Spending Supercycle

Amid this volatile backdrop and the risk of further geopolitical shocks, global defense spending looks poised for a historic acceleration as nations pivot from deterrence to active territorial and resource securitization. Given the scale of the transition, many analysts believe that we are looking at a defense spending “supercycle.”

In the US, President Trump is calling for a $1.5 trillion defense budget for 2027³. This would represent a near-60% increase on the budget for 2026. Meanwhile, in Europe, NATO allies are rapidly moving towards a new benchmark of 5% of GDP by 2035 (versus a previous benchmark of 2%). There’s a good chance that increases in defense spending here will be fast-tracked considering the current backdrop and the depleted state of Europe’s military capabilities following decades of underinvestment. It’s worth noting that Denmark’s military spending has surged from 1.4% to 3.2% of GDP in the space of just three years. Over this timeframe, the country’s defense equipment expenditure has quadrupled⁴.

Ultimately, global defense budgets appear to have shifted from discretionary outlays to a permanent baseline of high spending. As a result, major defense contractors currently have unprecedented revenue visibility.

Record Backlogs

Already, the increased level of defense spending is showing up in the backlogs of companies operating in the industry. Today, many leading defense contractors have enormous backlogs.

Take Rheinmetall, for example. At the end of Q3 2025, its backlog was a record €64 billion⁵ – a near-70% increase from its backlog at the start of 2024⁶. Note that as a European company, Rheinmetall is a primary beneficiary of the "strategic autonomy" movement in Europe, where nations are looking to reduce reliance on US defense contractors. Recently, the company has received large equipment orders from several European countries including Germany, Poland, and Hungary.

Another European company with a massive backlog is BAE Systems. At the mid-point of 2025, its backlog stood at £75.4 billion⁷ – more than double its estimated revenues in 2026. Like Rheinmetall, BAE Systems is benefiting as European countries turn to European businesses for defense solutions. However, as a major supplier to the US government, it is also benefiting from increased defense spending by the Trump administration – last year it secured a $1.2bn contract to provide the US Space Force with space-based missile tracking capabilities⁷.

Zooming in on Lockheed Martin –  the world’s largest defense contractor – it had a $179 billion backlog at the end of Q3, representing more than two and a half years of total sales. This backlog was diversified across high-priority platforms, including record-breaking orders for F-35 fighter jets, a massive production ramp-up for PAC-3 missile interceptors, and substantial multi-year contracts for CH-53K heavy-lift helicopters. In Lockheed Martin’s Q3 earnings report, management said that the company is seeing “unprecedented demand” right now and that the US Golden Dome missile defense system is likely to be a major growth driver in the future. It added that the group is investing aggressively in new physical production capacity needed to meet the top defense priorities of the US and its allies.

Analysts See Further Upside for Defense Stocks

As for the performance of these stocks, all three have risen by around 20% year to date, meaning that they have outperformed major global indexes by a wide margin. However, analysts remain bullish and are raising their price targets. For example, analysts at JP Morgan recently increased their target price for BAE Systems to 2,400p⁸ from 2,200p while analysts at Goldman Sachs hiked their target price for Rheinmetall to €2,300 from €2,200⁹. In both cases, these new price targets are well above the companies’ current stock prices. This signals that analysts expect the bull market in defense stocks to continue.

A Compelling Investment Case

Considering all these bullish factors, it’s hard to ignore defense stocks as we start 2026. Given the unprecedented level of geopolitical volatility globally and the structural shift in sovereign spending, the investment case for defense has never been more compelling. Right now, we are witnessing a fundamental re-rating of the defense industry as investors are realizing that the threat of geopolitical shocks is not going away and that defense contractors hold the key to national security in an era of unprecedented geopolitical fragmentation. With territorial stability becoming the new global imperative, the sector is no longer a discretionary option for investors but instead a strategic necessity.

Footnotes:

¹EOG, 6 Countries with the Largest Crude Oil Reserves in the World, as of June 25, 2025

²The Guardian, What are Trump’s latest tariff threats and could EU hit back with ‘trade bazooka’?, as of January 19, 2026

³Reuters, Trump calls for $1.5 trillion military budget in 2027, up from $901 bln in 2026, as of January 8, 2026

⁴European Business Magazine, European Defence Stocks Surge as Greenland Tensions Mount, as of January 19, 2026

⁵Rheinmetall, Q3 financial report: Rheinmetall shows steady growth and expands defence business by almost a third, as of November 6, 2025

⁶Rheinmetall, Financial figures for 2023: Rheinmetall is on track for success – Another all-time earnings high, new record order backlog, as of March 14, 2024

⁷Bae Systems, Today we announced the Group’s half year results for 2025, as of July 30, 2025

⁸Proactive Investors, BAE Systems rises on geopolitical uncertainty; US bank sums up the narrative, as of January 13, 2026

⁹Market Screener, RHEINMETALL AG, as of January 22, 2026