While the S&P 500 grinds through its fourth consecutive losing week and tech darlings get hammered, one corner of the market is quietly printing money. Defence stocks have gained 11.7% year-to-date versus just 0.4% for global equities — and the gap is widening as the Middle East conflict intensifies.
The Morningstar Global Aerospace and Defense Index barely flinched during the recent selloff, dropping just 1.4% during a week when global stocks cratered 3.7%. That kind of relative strength isn’t accidental. “Geopolitical risk is at an all-time high,” says Aneeka Gupta, director of macroeconomic research at WisdomTree. “The pace of threats and attacks has been unprecedented.”
The thesis is straightforward: the world is rearming, and the spending commitments are structural, not cyclical. Europe is the biggest story. After decades of freeloading on American military protection, European nations are scrambling to rebuild their defense capabilities. Germany alone is projected to increase its annual defence budget by more than €60 billion by 2029. NATO members are racing to meet — and exceed — the 2% of GDP spending target that Trump has been hammering since his return to office.
The earnings are following the rhetoric. Rolls Royce reported a 14% revenue increase and 38% jump in underlying operating profit, driven by “sustained demand across transport, combat and submarine programmes.” These aren’t speculative growth stories — they’re companies with multi-year government contracts and expanding order books.
But here’s where it gets tricky for investors arriving late to the party. Valuations have stretched considerably. Lockheed Martin’s price-to-earnings ratio has more than doubled from around 14 in late 2023 to over 30 today. You’re paying a premium for what the market now considers a structural growth story. The question is whether that premium is justified or if the easy money has already been made.
The bear case is a recession forcing European governments to redirect spending toward social programs, especially if the Ukraine war ends and the urgency fades. But most analysts think that scenario is unlikely to reverse the trend entirely. The era of assuming peace is the default setting has ended. Countries that underinvested in defence for thirty years aren’t going to stop rebuilding after two or three years of catch-up spending.
For portfolio construction, the takeaway is clear: defence stocks are functioning as a genuine diversifier in 2026. When oil shocks, trade wars, and geopolitical flare-ups send growth stocks tumbling, these names hold up. Whether you’re looking at U.S. giants like Lockheed Martin and RTX or European names like Rolls Royce and BAE Systems, the sector offers something increasingly rare in this market — earnings visibility and downside protection. In a year where almost nothing is working, defence is living up to its name.
