While most investors have spent 2026 worrying about tariffs, rate cuts, and AI valuations, one corner of the market has been quietly delivering double-digit gains with almost no fanfare: defence stocks.
The numbers are striking. The Morningstar Global Aerospace and Defense Index is up 11.7% year-to-date, while global stocks as measured by the MSCI ACWI Index have gained just 0.4%. During the week of March 6 — when markets sold off sharply on Iran escalation fears — the defence index dropped only 1.43% compared to a 3.7% decline for global equities. In other words, defence stocks are not just outperforming. They are providing genuine portfolio protection during the exact moments investors need it most.
The catalyst is obvious: geopolitical risk is at levels not seen in decades. The Iran conflict, ongoing tensions in Ukraine, and rising military budgets across Asia have created a structural demand boom for weapons, surveillance systems, and military hardware. But here is the part most people are missing — this is not a short-term trade tied to one conflict. It is a multi-year spending cycle that is just getting started.
Europe is the biggest story. After decades of dramatically underinvesting in defence, European NATO members are scrambling to catch up. Germany alone is set to increase its annual defence budget by more than €60 billion by 2029. The UK, France, Poland, and the Nordics are all on similar trajectories. “Europe is building from a much lower base,” noted Aneeka Gupta, director of macroeconomic research at WisdomTree. “The pace of threats and attacks has been unprecedented. Geopolitical risk is at an all-time high.”
The earnings back it up. Rolls Royce reported a 14% revenue increase and a staggering 38% jump in underlying operating profit in its latest full-year results, driven by “sustained demand across transport, combat, and submarine programmes.” Lockheed Martin’s price-to-earnings ratio has expanded from about 14 in late 2023 to over 30 today — a sign the market is pricing in years of elevated spending.
The risk? These stocks are no longer cheap. If a recession forces European governments to prioritize social spending over military budgets — or if multiple conflicts resolve simultaneously — the premium valuations could compress quickly. But most analysts believe higher defence spending is a permanent structural shift, not a cyclical blip. For investors looking for a sector with both momentum and a macro tailwind behind it, defence is hard to ignore right now.