Defense used to be a “headline trade”: it surged when a war broke out, then faded back into the background. Early 2026 suggests something different.
With tensions flaring simultaneously, from America’s actions in Venezuela, to renewed attention on Greenland and the Arctic, to sharpening China–Japan frictions, defense spending is becoming a standing line item rather than a episodic reaction. Markets are beginning to treat it less like a spike and more like a baseline.
Spending is indeed rising, but not in a uniform or carefree way. Governments want more security, yet they also want discipline. Europe is trying to lock urgency into multi-year plans, while the United States is signalling a tougher message to contractors: deliver first, get paid later. The result is that higher budgets no longer lift all boats equally. Within defense, winners and losers are becoming easier to spot.
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The definition of “defense” itself is widening. It is no longer just about weapons. Infrastructure resilience, cyber-security, satellite networks and secure communications are increasingly bundled into national-security budgets. NATO’s recent commitments reflect this shift. The old shorthand of spending “2% of GDP” is being replaced by a broader target: up to 5% by 2035, with as much as 1.5% explicitly earmarked for security-related areas such as protecting networks, logistics and critical infrastructure.
What are Europe’s defense priorities?
Europe’s priorities are clear. Beyond buying equipment, governments want local supply chains. That means factories, skilled labour and production capacity on European soil. Firms that can expand output at home, ammunition makers, electronics suppliers and systems integrators, stand to benefit more than those that simply sell finished kit from abroad.
America’s approach is sharper. President Trump has called for a $1.5trn military budget for 2027, a dramatic increase from the $901bn proposed for 2026. But the ambition comes with strings attached. Contractors are being warned that underperformance will bring scrutiny, and that shareholder payouts may take a back seat to delivery and production. Demand may rise, but politics will loom larger, especially around programmes that slip or overrun.
Technology is accelerating these tensions. Artificial intelligence is reshaping defense faster than many expect, and in practical ways. Unmanned systems (drones in the air and at sea) scale more quickly than traditional platforms. Spending on sensing and tracking is rising, from satellites to radar. Secure connectivity matters more, as communications must function under stress. And software that turns torrents of data into usable decisions is becoming as valuable as hardware.
Yet AI also brings risk. Accidents, misuse or public backlash can trigger sudden regulatory responses. Projects can be slowed, rules rewritten and money redirected. In defense, controversy arrives quickly.
The defense sector is increasingly fragmented
The sector itself is increasingly fragmented. Air and missile defense focuses on protecting cities and infrastructure, with firms such as RTX, Lockheed Martin NYSE:LMT, Thales [Euronext:HO] and Saab exposed to order flow and delivery schedules. Ammunition and weapons manufacturing (Rheinmetall [XETR:RHM], BAE Systems LON:BA., and parts of General Dynamics NYSE:GD) matters when governments want to rebuild stockpiles fast, but face political pressure on pricing.
Space, surveillance and secure communications, where companies like Northrop Grumman, L3Harris, Leonardo and Palantir operate, offer growth tied to data and AI, but also higher volatility. Naval shipbuilding promises large contracts, yet is plagued by capacity constraints and long timelines.
Japan deserves special mention. Its rising security budget is feeding a diverse ecosystem, from Mitsubishi Heavy Industries’ aerospace programmes to NEC’s communications networks, reflecting how modern defense blends heavy industry with information systems.
For investors, defense is now discussed as “part of all portfolios” for a reason. Geopolitics has reset the baseline. Europe is trying to turn urgency into a roadmap. And AI is changing what defense means, shifting budgets from big platforms alone toward information advantage. The year has barely begun, but it has already made one thing clear: defense is no longer just a reaction. It is becoming a constant.
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