In a world where geopolitical shocks have become the new normal, investors are scrambling for havens. As global markets stutter under the weight of conflict and uncertainty, one sector is standing apart, not as a casualty of the chaos but as a direct beneficiary: defence.
The contrasting performance is stark. In the volatile week to 6 March, the Morningstar Global Aerospace and Defense Index dipped a modest 1.43%. In the same period, the broader MSCI ACWI Index of global stocks fell by 3.7%. Zoom out to the year so far, and the divergence widens further: global stocks are up just 0.4%, while defence stocks have surged 11.7%.
“A lot has changed since the start of the year,” Aneeka Gupta, director of macroeconomic research at asset manager WisdomTree, told MoneyWeek. “The pace of threats and attacks… has been unprecedented. Geopolitical risk is at an all-time high.” This, she notes, has created “more momentum towards defence stocks as a whole,” positioning them as a rare source of portfolio protection in what she terms a “new less predictable environment.”
Europe’s seismic spending shift
The drivers of this momentum are not fleeting. The opening months of 2026 have seen a cascade of crises, from Trump’s intervention in Venezuela and threats to acquire Greenland unilaterally to the ongoing conflict with Iran. This has cemented a global consensus that spending on defence must rise, but the story is most compelling in Europe.
“I see Europe as the region with the biggest [defence] under-investment gap,” said Gupta. While the US is also increasing its budget, it is doing so from a larger base. Europe, by contrast, is building from a much lower level after decades of underinvestment relative to NATO guidelines.
Now, that is changing at a staggering pace. Germany is leading the charge, embarking on a spending surge of historic proportions. Its defence budget is projected to rise from €86 billion in 2025 (2.4% of GDP) to a planned €153 billion by 2029—a figure that would represent 3.5% of GDP and dwarf the projected spending of the UK and France. This radical increase, supported by temporarily suspending the constitutional ‘debt brake’, follows Germany first meeting NATO’s 2% guideline only in 2024, after a decade averaging around 1.2%.
It is part of a wider NATO push, with members agreeing to new targets: 3.5% of GDP for core defence and an additional 1.5% for critical infrastructure resilience by 2035. France has increased its 2026 allocation to €68.5 billion, while Spain and Italy have also raised spending to the 2% mark. This structural shift has buoyed European defence shares, with Germany’s Rheinmetall up 2.0% year-to-date and Italy’s Leonardo up 5%.
Technology defines the modern battlefield
The spending boom is not just about buying more traditional kit; it is increasingly about next-generation capability. The research briefing highlights several technological trends where investment is concentrating.
Artificial Intelligence is becoming pervasive, moving from pilot projects to scaled deployments for predictive maintenance, autonomous systems, and intelligent logistics workflows. The race for hypersonic missiles, which current air defences struggle to counter, is driving investment in new detection technologies. Cybersecurity is now fully integrated into military planning, consuming larger budget shares, while additive manufacturing (3D printing) is shifting from prototyping to full-scale production of components to bolster supply chain resilience.
This focus on innovation is reflected in corporate performance. Rolls-Royce, which derives about 25% of group revenue from defence, announced full-year results on 26 February showing a 14% revenue increase and a 38% jump in underlying operating profit, supported by “sustained demand across transport, combat and submarine programmes,” according to Morningstar equity analyst Loredana Muharremi. For 2026, the company expects underlying operating profits between £4.0-4.2 billion.
Valuations and the risks ahead
The sector’s popularity has made it expensive. The valuation of industry bellwether Lockheed Martin illustrates the point. Data from Macrotrends shows its price-to-earnings (P/E) ratio has soared from around 14 in September 2023 to over 30 at the start of March 2026—a level 54% higher than its ten-year historical average of 20.27. This pricing suggests investors believe the tailwinds are structural and long-term.
However, analysts caution that the outlook is not without risks. Marcel Stötzel, portfolio manager at Fidelity European Trust, envisions a scenario where a future recession forces European governments to prioritise social welfare spending, potentially making defence budgets “an easy target,” especially if the war in Ukraine has concluded.
Byron Callan, Managing Director at Capital Alpha Partners, adds a note of caution on conflicts themselves, suggesting gains for munitions suppliers could be short-lived if a conflict neutralises a threat, and that US acquisitions tend to plateau after initial surges.
Routes for investors
For investors convinced of the sector’s long-term trajectory, routes in are varied. Direct investment in major primes like Lockheed Martin, Rolls-Royce, or Rheinmetall is one option. Alternatively, a range of thematic funds offer targeted exposure.
The VanEck Defense UCITS ETF offers broad global exposure, while the WisdomTree Europe Defence UCITS ETF provides a pure-play on the European theme, holding stocks like BAE Systems, Thales, and Rheinmetall. For those focusing on innovation, the Global X Defence Tech UCITS ETF targets defence technology companies, and the HANetf Future of Defence Indo-Pac ex-China UCITS ETF capitalises on spending trends in a tense Asian region, where budgets in Korea, China, and Japan are also expanding.
The consensus emerging from boardrooms and government defence ministries is that the world has entered a new, less secure era. The rules-based order that ensured relative peace for decades can no longer be relied upon. In this environment, defence spending—and the companies that fulfil those contracts—appears to have moved from a cyclical consideration to a structural fixture of the global economy.
