Hey there, bargain hunter. The geopolitical backdrop is messy right now – and in this particular sector, messy is a tailwind.
Global defense spending hit $2.63 trillion in 2025, up from $2.48 trillion the year before. For the first time ever, all 32 NATO allies met or exceeded the 2% of GDP spending commitment – compared with just three allies hitting that target back in 2014. Europe alone increased defense budgets by roughly 20% year over year. That capital is flowing directly into the order books of the companies that build the systems governments actually need.
Here’s where it gets interesting. This isn’t a one-year budget pop. NATO has committed to a 5% of GDP defense target by 2035. Goldman Sachs flagged the EU’s ReArm Europe plan as adding more than €800 billion of incremental defense spend. The Trump administration has proposed what would be the largest U.S. defense budget in history – approaching $1.5 trillion for FY2027 – with particular emphasis on air, missile, and space capabilities. Multi-year procurement cycles mean backlog visibility that most industries would kill for.
The Stocks and the Numbers
- LMT (Lockheed Martin): Backlog surpassed $170 billion in late 2025. Demand for the F-35 is expanding across Poland, Japan, and Finland. Contract extensions for missile systems and hypersonic development are ongoing. Consistent dividend track record. The primes with cleared facilities and multi-decade government relationships are absorbing the bulk of this spending wave.
- NOC (Northrop Grumman): The B-21 Raider stealth bomber entered low-rate initial production with a $4.5 billion acceleration deal anticipated. International sales surged 32% year over year. Backlog reached $95.7 billion. Morgan Stanley carries an overweight rating with a $745 price target, against a stock that was still trading around $558 in mid-May.
- GD (General Dynamics): Aerospace book-to-bill sitting at roughly 1.2x. Morgan Stanley sees $435 as fair value versus a ~$346 close in May. The defense segment is outperforming peers in 2026 according to the same analyst team.
For investors who’d rather not pick individual names, the ETF layer makes sense here. ITA (iShares U.S. Aerospace & Defense ETF) returned nearly 57% over the past year with a 0.38% expense ratio – the lowest in the category. SHLD (Global X Defense Tech ETF) is the cleaner play on European rearmament and defense tech, up nearly 49% over the trailing year. PPA (Invesco Aerospace & Defense) has actually outperformed both in 2026 with a broader basket approach that picks up mid-cap suppliers and defense services names.
The second track – and this is the part people skip – is drones, counter-drone systems, AI battlefield targeting, satellite ISR, and cyber. That layer barely existed as an investable category five years ago. SHLD has meaningful exposure there through Palantir and autonomous systems names. The traditional aerospace indexes miss most of it by construction.
The Risks Are Real
European defense suppliers like Rheinmetall and BAE Systems have already rallied 200% and 60%, respectively, meaning that entry point has passed for most retail investors. U.S. names are more reasonably priced but carry fixed-price contract risk and potential policy restrictions on dividends and buybacks if Congress ties shareholder returns to production performance. Watch for that debate intensifying in the second half of 2026.
The spending commitments are signed. The budgets are allocated. The question isn’t whether defense contractors win contracts – it’s whether the market has already priced the obvious. Right now, U.S. primes still look reasonable. The European names? That ship sailed a while back. Start here with LMT, NOC, or PPA if you want diversified exposure without chasing a crowded trade.
