How to play defense stocks in 2026

Key Concepts

• Defense Stock Performance: Strong year-to-date performance in 2025, particularly post-selloff.
• Geopolitical Instability: Ongoing conflicts (Ukraine, China/Taiwan, Israel/Gaza) driving defense spending.
• AI Integration: Long-standing and increasing role of Artificial Intelligence in aerospace and defense.
• M&A Activity: Bifurcated market with potential for mergers and acquisitions, particularly for undervalued companies.
• Emerging Technologies: Focus on drone defense, electronic warfare, and navigation in GPS-denied environments.
• Munitions Demand: Extremely high demand for weapon systems and munitions, requiring significant production increases.

Defense Stocks & Emerging Technologies: Outlook for 2026

Year-to-Date Performance & Post-Selloff Resilience

The defense sector has demonstrated strong performance year-to-date in 2025, as evidenced by a heat map showing significant gains for companies like GE (up 87%) and RTX (up 60%). Lockheed Martin, while an exception, only broke even. Notably, these stocks exhibited resilience during the post-Liberation Day selloff, outperforming other sectors. This suggests a degree of investor confidence in the sector’s stability.

Global Instability & Defense Budget Increases

A primary driver for continued positive outlook in 2026 is the persistent global instability. Events such as Ukraine’s referendum attempts and China’s embargo exercises underscore the ongoing geopolitical tensions. This instability is translating into increased defense budgets worldwide. NATO is increasing spending to 3.5% of GDP, and the US defense budget is projected to exceed $1 trillion in 2026, with further increases anticipated. As stated by the guest, “there’s going to still be a lot of instability globally and the defense budgets are up globally.”

The Role of Artificial Intelligence (AI)

AI is not a new concept in aerospace and defense, with roots dating back to autopilot systems in 1912, described as a “closed loop feedback system.” Modern AI applications, exemplified by companies like Palantir and other defense tech firms, focus on automation, optimization, and the development of autonomous systems. The emphasis is on reducing human involvement in low-level decision-making. The guest emphasized that companies they favor are actively participating in this AI integration.

Mergers & Acquisitions (M&A) Prospects in 2025-2026

The M&A landscape is “bifurcated.” While high valuations in the broader aerospace and defense industry may limit large-scale deals, opportunities exist for acquiring undervalued companies with strong fundamentals, high barriers to entry, and sole-source programs. ALB International, a portfolio company with both aerospace/defense and industrial businesses, was cited as a potential candidate for financial engineering and M&A activity within the next 12-18 months. The lower cost of money due to anticipated Fed interest rate cuts is expected to facilitate these transactions.

Emerging Technologies: Drones, Defense, and GPS-Denied Environments

Recent conflicts, particularly in Ukraine and Israel/Gaza, have highlighted the proliferation of drones and the critical need for drone defense systems. The guest noted the “inundation of drones” in these conflicts. Defense strategies are evolving to include electromagnetic spectrum-based defenses, lasers (like Israel’s “Iron Beam”), and other countermeasures. The limitations of missile capacity on various platforms (aircraft, ships, drones) are driving the demand for diverse defense solutions.

Furthermore, the increasing prevalence of GPS-denied environments necessitates alternative navigation systems, such as magnetic navigation, to ensure continued operation of aircraft and weapon systems. The guest referenced the “Buck Rogers” trade, alluding to the futuristic nature of these emerging technologies.

Data & Statistics

• Ukraine Munitions Consumption: Seven years’ worth of munition production for systems like HIMARS, Javelin, and Stinger were expended in a single year during the initial phase of the war in Ukraine.
• Israel Patriot Missile Usage: Israel launched approximately 100 Patriot missiles in a single month during recent conflicts.
• Stock Valuation: The guest noted that current stock valuations are “not far above” the rate of munitions expenditure, indicating a potential need for increased production.

Investor Outlook for 2026

Investors should focus on defense tech companies, anticipating continued strong performance. Potential IPOs from companies like Anduril and SpaceX are anticipated. Maintenance services will remain a stable revenue stream. However, the most significant opportunity lies in the production of weapon systems, missiles, rockets, and munitions. The guest predicted a “doubling quadrupling of weapon system production in 2026 and probably beyond” to meet the escalating global demand.

Synthesis & Conclusion

The outlook for the aerospace and defense sector in 2026 is overwhelmingly positive, driven by sustained geopolitical instability, increasing defense budgets, and the rapid development of emerging technologies. AI integration, M&A activity, and the demand for drone defense and advanced munitions represent key investment opportunities. Investors should prioritize companies positioned to capitalize on these trends, particularly those involved in the production and maintenance of critical weapon systems. The sector is poised for continued growth and innovation in the coming years.