Defence stocks are soaring: what's going on and how to invest in the trend

Defence stocks have been in focus ever since Russia’s invasion of Ukraine but have taken on a fresh dimension in recent days on rising geopolitical tensions, specifically following US actions from Venezuela to Greenland. Now global defence stocks are marching higher after US President Donald Trump called for a $1.5 trillion defence budget in 2027, which would represent a 50% increase in spending.

“After the long and difficult negotiations with Senators, Congressmen, Secretaries, and other Political Representatives, I have determined that, for the Good of our Country, especially in these very troubled and dangerous times, our Military Budget for the year 2027 should not be $1 Trillion Dollars, rather $1.5 Trillion Dollars,” he wrote in a TruthSocial post on Wednesday.

European defence names led the charge, with BAE Systems rising 6% on Thursday morning to take its gains to almost 20% in 2026 as it looks set to benefit from rising defence budgets on both sides of the Atlantic.

Babcock rose before paring gains but remains +17% YTD. Rheinmetall rose 3% to take YTD gains to 15%, while Renk, Leonardo, Chemring and Saab were all firmer. The Stoxx Europe Aerospace and Defence index added 2.5% in early trading on Thursday. BAE Systems and fellow Nato supplier Chemring  have the most US exposure and therefore seem best placed to benefit from additional Pentagon spending. 

Reading-based Cohort, the parent company of seven defence tech firms - Chess, EID, ELAC SONAR, EM Solutions, MASS, MCL and SEA – rallied over 4% as it has US exposure. Other UK names Qinetiq and Babcock should also be in a position to tap into higher US defence budgets.

With the planned additional spending, Northrop Grumman rallied almost 7% in premarket trade on Thursday, Lockheed Martin was similarly up 6.7% higher, RTX advanced about 5%, while Kratos Defense was up 6.6%.Palantir, which is a major Pentagon contractor, rose 2%.

Some of the US names had slipped yesterday because Trump also said he would not permit dividends and stock buybacks for defence companies...but the realisation of enormous amounts of new spending has dawned, it seems. And it plays into a broader theme of monetary and fiscal expansion designed to support increased military spending.

It reflects a pre-war era that is being defined by major powers using hard power. This is not going to go away, it will only exacerbate. The news cycle of the last week has underlined that, as I said in a not earlier this week, we are in a new world where ‘might is right’.

This has been coming for some time. As I noted in 2023, a speech by ECB president Christine Largarde was for me “a signal that we are about to go into a protracted economic (and maybe real) war and it will require the mobilisation of the state and people – developed world central banks (Fed, ECB, BoE, BoC) will act together to orchestrate fiscal spending and suppress yields.”

It took a couple of years and some handwringing in Germany but eventually Europe is finally moving to a collective economic war footing.

European defence spending is already 50% higher in nominal terms than in 2022 and is set to grow rapidly over the coming years as countries increase allocations to 5% of GDP following the key June Nato summit, which underscored the sense that the US has become an unreliable ally to Europe. The change was Trump and threats made last year to acquire Greenland and a concerted verbal assault on European nations’ lack of defence spending.

Now the latest escapades in Venezuela, the capture of a Russian-flagged tanker in the north Atlantic and threats to take Greenland by force if necessary underscore a step-change that has taken place since the publication in November of the new U.S. National Security Strategy, which is in effect the 'Trump Corollary' to the Monroe Doctrine" that declares the US will assert its political, economic and military will across the Western Hemisphere.

Meanwhile in Asia, tensions between China and Japan have risen lately with China restricting exports of some dual-use items to Japan after Tokyo approved a record military budget.

And so there are plenty of reasons for this defence trade to continue in 2026. We have a) a belligerent Russia still fighting in Ukraine, b) a major and credible European rearmament programme like we have not seen in 80 years, c) an increasingly confident China in terms of international flex and Taiwan, d) the tail risk of a Nato breakup evidenced by the threats to Greenland, and e) an increasingly unpredictable US President who is increasingly prepared to utilise US hard power to pursue diplomatic and economic ambitions. Now we can add f) a massive increase in US defence spending on the cards.

Of course we could get a peace deal in Ukraine. Hopes there are rising, but don’t be complacent.

As per my note of 9 December 2025:

“I still like European defence as a theme. The rearmament story is yet to really even begin and whilst we have seen a material rerating in several large defence names on the continent and in the UK, a selloff in the autumn on some fuzzy ‘Ukraine peace deal hope’ trade is overdone and fails to capture the long-term value in the sector. 

“We are seeing a paradigmatic realignment in EU/Nato/UK defence policy. The 20-40% decline in defence stocks since September appears overcooked. Any peace deal is likely to just begin the next phase in confrontation where we see Russia regenerate its armed forces and Europe materially increases defence spending to deter the threat.”

The start of 2026 has only underlined this thesis.

How to approach as an investor

Single stock names grab the headlines but there are ways to gain diversified exposure to the defence spending theme via a range of funds.

VanEck Defence UCITS ETF (DFNS): Broad global defence ETF, with largest holdings in RTX, Thales, Leonardo, Palantir and Saab.

WisdomTree Europe Defence Acc UCITS ETF (WDEF): For a play on European rearmament specifically this fund’s major holdings are in Thales, BAE Systems, Rheinmetall, Leonardo, Safran, Rolls-Royce and Saab.

Future of Defence UCITS ETF (NATO): Despite main holdings being Safran, BAE Systems and Rheinmetall, it’s more weighted towards the US – and therefore perhaps higher Pentagon spending. The fund is about 60% exposed to US names such as RTX, Cisco, Lockheed Martin, General Dynamics, Northrop Grumman and Palantir.

Invesco Defence Innovation UCITS ETF (IDFN) offers exposure to smaller cap tech names developing sophisticated weapons and defensive systems, such as drones. It’s highly dispersed but some familiar names that are among its largest holdings include Kratos and Saab, as well as drone makers AeroVironment and Red Cat.