Greenland, NATO, Venezuela, Iran -- not a day goes by that global security doesn't seem to be fraying. Yet geopolitical uncertainty, a hallmark of President Donald Trump's second term, looks here to stay. It should be more fuel for defense stocks.
The sector, up 55% over the past year, is benefiting from a global armaments push. Global military spending exceeded $2.5 trillion in 2025. It's expected to top $3 trillion by 2027, according to Global X ETFs, implying double-digit growth for the foreseeable future.
Increased military activity is positive for defense stocks. The U.S. becoming an "unreliable ally" is also good for the European defense sector, though that will take time to play out, says Rob Stallard, a veteran defense analyst at Vertical Research Partners in the United Kingdom.
In the U.S., two of his picks are submarine and tank maker General Dynamics and defense electronics leader L3Harris Technologies.
General Dynamics benefits from the push for more boats, munitions, and cyberwarfare technologies.
L3Harris is spinning out its missile business as a separately traded public company, aiming to complete it by the end of the year. The U.S. Department of War plans to invest $1 billion in the spinoff. That capital, and the money raised in the initial public offering, will be used to expand capacity.
Jefferies analyst Sheila Kahyaoglu believes the deal could unlock combined gains of 30% in L3 and the spinoff stock, noting that missile businesses trade at higher multiples than diversified prime contractors.
In Europe, Stallard likes Italy's helicopter maker Leonardo and Britain's submarine and munitions maker BAE Systems; both benefit from higher European military spending, expected to grow at a double-digit rate.
The drone business is "red hot," notes William Blair analyst Louie DiPalma, pointing out that backlogs are surging amid initiatives such as the U.S. Golden Dome. Two of Wall Street's favorites are AeroVironment and Kratos Defense & Security Solutions.
AeroVironment has surged 28% this year, to $312, and trades at 90 times estimated 2026 earnings. Wall Street still has a consensus Buy and price target of $384 on it. Kratos, up 50% this year to $114, has already exceeded Wall Street's average forecast of $112. At 106 times estimated 2027 earnings, it's now pricier than Nvidia and other artificial-intelligence stocks.
The rest of the sector is hardly cheap. Large diversified U.S. defense contractors trade for 24 times estimated earnings, up from an average of 16 times a year ago. Yet they're expected to boost earnings 15% this year, faster than their 6% average annual growth in recent years.
Other risks: Defense companies falling behind on technology development and production could be forced to cut dividends and suspend share repurchases, per a new executive order from Trump. While that may be more of a negotiating position, the main message to contractors is to increase investment and prepare for growth, says RBC Capital analyst Ken Herbert.
One of Herbert's top picks is Northrop Grumman; steady business execution and exposure to higher growth areas such as space and nuclear weapons should be tailwinds, he notes.
Owning defense stocks today assumes that geopolitical tensions stay elevated. Steep multiples and a breakout of global harmony are the risks. Assuming that doesn't happen, the sector should be a winner.
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