NATO budgets are climbing and order backlogs are surging. Here’s which defense stocks are leading the rally in 2026 — and whether valuations are overheating.
Defense is no longer a cyclical trade. In 2026, it is a structural theme.
Following renewed geopolitical tensions in Eastern Europe and the Middle East, NATO members have accelerated their commitment to spend at least 2% of GDP on defense. Several countries — including Germany, Poland, and the Nordic bloc — are moving closer to 2.5% targets. The result: a multi-year procurement cycle that is only in its early innings.
According to analysts at major European investment banks, the current rearmament cycle resembles a “super-cycle” rather than a temporary spike. Order visibility extends well beyond 2028, with procurement programs for air defense systems, armored vehicles, missiles, and advanced electronics already funded.
This macro backdrop explains why leading defense contractors have posted double-digit gains year-to-date.
Among the global heavyweights:
Lockheed Martin continues to benefit from sustained demand for the F-35 program and missile systems.
Leonardo has seen renewed investor interest thanks to its electronics division and participation in next-generation fighter programs.
Rheinmetall remains one of Europe’s most leveraged plays on land systems and ammunition restocking.
The key driver? Backlog.
Read more: Defence spending is up — but on all the wrong things
Record Backlogs and Earnings Visibility
If there is one metric investors are watching in 2026, it is order backlog.
Lockheed Martin reported a backlog exceeding $160 billion in recent quarters, offering multi-year revenue visibility. Rheinmetall’s order intake has hit record levels, particularly in munitions and armored platforms, while Leonardo’s defense electronics and helicopter segments continue to secure long-term contracts across Europe and the Middle East.
Backlog matters because it reduces earnings uncertainty — a rare feature in today’s volatile macro environment.
Portfolio managers highlight that defense stocks are increasingly treated as "quasi-infrastructure plays": predictable cash flows, government-backed demand, and limited exposure to consumer cycles.
However, valuation multiples are no longer cheap.
Rheinmetall, for instance, trades at significantly higher forward P/E levels compared to its historical average. Leonardo has rerated sharply from its discount levels of 2022–2023. Lockheed Martin, traditionally viewed as a defensive dividend stock, now reflects premium pricing relative to broader industrial peers.
This raises an uncomfortable but necessary question: is there euphoria building?
Multiples Expansion: Rational Repricing or Overheating?
The rerating of defense stocks is not purely speculative. Analysts argue that earnings revisions have been consistently upward, justifying part of the multiple expansion.
European governments are not merely replenishing depleted inventories; they are modernizing armed forces. Air defense systems, drone warfare capabilities, cybersecurity, and space-based assets are driving a qualitative shift in spending patterns.
Still, risks remain.
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Political shifts in major NATO countries could slow procurement timelines.
Execution risks — especially in complex aerospace programs — can pressure margins.
If geopolitical tensions were to de-escalate meaningfully, sentiment could cool rapidly.
For now, however, fund flows tell a clear story: institutional capital continues rotating into defense names, particularly in Europe, where fiscal support appears most durable.
The 2026 rally in defense equities reflects a new geopolitical normal — one defined by sustained strategic competition rather than short-term conflict.
For investors, the opportunity is evident. The challenge is discipline: entering after double-digit gains requires selectivity, close monitoring of valuation metrics, and awareness that even structural themes can overshoot.
Defense may be a long-term trend. But even long-term trends have cycles.
