NATO Friction Can’t Halt the Bull Case for Defense Stocks

NATO is currently navigating one of the most precarious periods in its history. After tensions with Denmark earlier in 2026, the US is now locked in a fresh spat with Germany, further testing the strength of the transatlantic alliance. The bull case for defense stocks remains intact, however, despite this intra-alliance discord. With countries all over the world ramping up their defense budgets amid heightening global instability, defense companies are seeing strong revenue and earnings growth in 2026 along with rapidly rising backlogs.

RTX Just Raised Its Guidance

Take RTX Corp, for example. Its recent earnings¹ showed that its defense segment, Raytheon, delivered 10% year-over-year revenue growth in Q1. Driving the strong performance here was demand for the company’s land and air defense systems and higher volumes on naval munitions programs. On the back of this Q1 growth, the company raised its guidance for 2026. It now expects group adjusted sales of $92.5 billion to $93.5 billion (versus $88.6 billion in 2025) along with adjusted EPS of $6.70 to $6.90 (versus $6.29 for 2025). At the end of the first quarter, its defense backlog stood at $109 billion while its total backlog was $271 billion.

It’s worth noting that RTX’s share price has pulled back recently as conflict in the Middle East has de-escalated. This has brought the company’s valuation down to very reasonable levels. With analysts forecasting earnings per share of $6.90² for 2026, the company’s forward-looking P/E ratio is now only 25. At that earnings multiple, analysts see scope for material stock price upside – the average analyst price target today is $208 which is about 20%² above the current share price.

GE Aerospace’s Defense Orders Are Surging

Turning to GE Aerospace³, its Defense & Propulsion Technologies (DPT) segment delivered 19% year-over-year growth in Q1 with Defense & Systems revenue up 14%. Orders within the DPT segment came in at $6,174 million, up 67% year-over-year. During the quarter, the company secured a contract for T408 engines for the US Marine Corps along with a contract with the US Air Force to design the GEK1500 – a next-generation engine for small Collaborative Combat Aircraft (CCA) in partnership with Kratos. Looking ahead, GE anticipates mid-to-high single digit growth in its DPT segment in 2026 and low double-digit top-line growth for the group as a whole.

Mirroring their stance on RTX Corp, Wall Street analysts maintain a bullish outlook on GE Aerospace. At present, the average price target is $349², which is approximately 20% above the current share price.

Rheinmetall is Expecting Strong Growth in 2026

Zooming in on German defense powerhouse Rheinmetall, it advised in early May⁴ that it generated revenue of €1.94 billion in Q1, up 7.7% year-over-year. Operating profit for the quarter was €224 million versus €191 million in Q1 2025, with operating margin coming in at 11.6% versus 10.5% a year earlier. Looking ahead, the company said that it expects 40% to 45% revenue growth for 2026 and an operating margin of around 19%, as well as a cash conversion rate of above 40%. Its backlog at the end of Q1 stood at around €73 billion – 31% above the corresponding figure for the previous year.

In terms of price targets here, the average price target is currently €2,039⁵. That is more than 40% above the current share price.

A Compelling Entry Point?

Looking at these Q1 numbers, and the guidance for 2026, the investment case for defense stocks is still very much intact. While there are some frictions within NATO, a lot of companies within the defense sector are firing on all cylinders at present.

Given that valuations across the defense industry have come down recently, now could be a good time to take a closer look at the sector. Those interested in gaining exposure to defense stocks may wish to check out the Themes Transatlantic Defense ETF (Ticker: NATO), which aims to track the Solactive Transatlantic Aerospace and Defense Index.

Footnotes:

¹RTX Reports Q1 2026 Results, as of April 21, 2026

²LSEG, as of May 6, 2026

³GE Aerospace announces first quarter 2026 results, as of April 21, 2026

⁴Rheinmetall, Rheinmetall AG: Preliminary operating margin in line with market expectation, as of May 4, 2026

⁵Investing.com, Rheinmetall AG (RHMG), as of May 6, 2026