In recent months, defense stocks have surged in popularity as global geopolitical tensions continue to mount. From escalating conflicts in Eastern Europe and the Middle East to rising concerns about China’s assertiveness in the Indo-Pacific, investors are increasingly viewing the defense sector as a potential haven. But as defense stocks outperform broader indices, questions emerge: is this rally built on long-term fundamentals or short-term speculation?
Geopolitical Pressures Fuel Market Momentum
The world is navigating a period of heightened geopolitical uncertainty. The ongoing war in Ukraine, renewed instability in the Middle East, tensions across the Taiwan Strait, and NATO’s growing focus on deterrence have all led to increased military spending by major economies. The United States, already the largest defense spender globally, passed a record $886 billion defense budget for FY2024. NATO allies are also ramping up expenditures, with many now committing to meet or exceed the alliance’s benchmark of spending 2% of GDP on defense.
This backdrop has provided significant tailwinds for defense stocks, particularly those tied to high-tech weapons systems, surveillance technology, and next-generation warfare. The market is responding to the expectation that governments will continue prioritizing national security, resulting in multiyear procurement contracts and rising order backlogs for defense contractors.
The Big Players: Key U.S. Defense Companies
Several U.S.-based defense giants are at the forefront of this rally, commanding attention not just for their stock performance but also for their strategic importance to national and global security. Here are some of the top companies leading the charge:
Lockheed Martin (LMT) is a global powerhouse in defense and aerospace. It is best known for the F-35, a highly advanced multirole fighter jet used by multiple allied nations. The company is also driving innovation in hypersonic weapons, satellite systems, and missile technologies, making it a key contributor to U.S. and allied military capabilities.
Following its merger with United Technologies, Raytheon Technologies (RTX) has emerged as a major force in both commercial and military aerospace. Its missile systems, including the widely deployed Patriot and NASAMS, are critical assets for U.S. partners worldwide, enhancing collective defense readiness.
Northrop Grumman (NOC) is a defense leader that plays a pivotal role in developing autonomous systems, cybersecurity frameworks, and space-based defense technologies. Flagship programs like the B-21 Raider stealth bomber and advanced missile defense systems underscore its growing significance in shaping future combat strategies.
General Dynamics (gd) is widely recognized for producing Abrams tanks and Virginia-class submarines. It is also a major supplier of land and naval defense platforms. Its Gulfstream aircraft also play important roles in military and governmental operations.
Although best known for its commercial jets, Boeing (BA) Defense, Space & Security Segment maintains a strong presence in the defense sector. Programs such as the KC-46 aerial refueling tanker and the T-7A Red Hawk trainer jet contribute significantly to the U.S. Air Force’s and allied militaries’ operational effectiveness.
For investors looking to dive deeper into the financial health, valuation metrics, and historical performance of these defense companies, the stock screener is a useful starting point. This tool allows users to compare key financial indicators, track recent trends, and monitor institutional activity across the sector, helping them make more informed investment decisions.
Investor Sentiment and Institutional Behavior
There has been a notable uptick in institutional interest in defense equities. As traditional safe-haven assets like gold and Treasury bonds face volatility amid interest rate uncertainties, defense stocks are gaining appeal as a form of geopolitical hedge. Several large defense ETFs, including the iShares U.S. Aerospace & Defense ETF (ITA) and the SPDR S&P Aerospace & Defense ETF (XAR), have recorded increased inflows since the start of 2024.
Retail participation is rising too, with younger investors beginning to view defense not just through a political or ethical lens but as part of a pragmatic investment strategy amid a multipolar world order. The enduring nature of government defense contracts, often shielded from recessionary forces, also adds to the perceived stability of these stocks.
Are Fundamentals Catching Up to the Hype?
While recent stock performance has been impressive, analysts are divided on whether valuations are justified by long-term fundamentals. Many defense companies are projecting strong future earnings, driven by increased backlog and rising order books. For instance, Lockheed Martin reported a backlog exceeding $150 billion as of early 2025, reflecting high demand for its products. Northrop Grumman has seen similar trends, particularly in its space systems division, which is growing rapidly thanks to rising demand for satellite defense technologies.
However, some caution is warranted. Defense spending cycles are heavily influenced by political winds. A shift in U.S. administration or changing public priorities could impact budgets and slow contract approvals. Additionally, geopolitical events can evolve unpredictably; a de-escalation of global tensions could cool off investor enthusiasm.
Future Outlook: Multi-Year Growth or Momentum Trade?
Industry experts suggest that the current rally may be more than a passing phase. According to a recent report by McKinsey & Company, global defense spending is projected to grow at a CAGR of 3.5 percent through 2030, with cyber warfare, space defense, and autonomous systems leading the charge. The U.S., EU, India, and East Asian economies are expected to account for the majority of this growth.
Moreover, the nature of modern warfare is changing. Traditional combat is being supplemented by cyberattacks, drone warfare, AI-driven surveillance, and hypersonic missile development. Companies heavily invested in these emerging technologies stand to benefit disproportionately from future defense contracts.
