Markets react to budget signals
Defense stocks surged globally after comments from Washington indicated plans to dramatically expand U.S. military spending, fueling investor optimism around long-term weapons procurement and defense infrastructure investment.
In U.S. trading, Northrop Grumman and Lockheed Martin jumped more than 9% at their highs before trimming gains. The rebound followed a sharp selloff earlier in the week triggered by new restrictions on executive pay and shareholder returns at major defense contractors.
Global defense rally accelerates
The move extended well beyond U.S. markets. A basket of European defense stocks tracked by Goldman Sachs climbed nearly 4%, pushing weekly gains toward 15%.
In Europe:
- BAE Systems surged more than 7%, supported by its heavy exposure to U.S. defense spending.
- Rheinmetall hit its highest level since October.
In Asia, defense names including Hanwha Aerospace, Aerospace Industrial Development Corp., and Howa Machinery also advanced.
Why investors are buying defense
Markets are responding to indications that annual U.S. defense spending could rise toward $1.5 trillion, a level that would represent one of the largest military budgets in history if approved by lawmakers.
The comments followed:
- Recent U.S. military action in South America
- Heightened rhetoric around territorial security and alliance obligations
- Continued pressure on allies to expand their own defense budgets
“Geopolitics is the inescapable story of 2026 so far,” said Neil Wilson of Saxo Markets, reflecting a growing consensus that global conflict risk is now a structural investment theme.
Long-term trend already in motion
The rally builds on years of sustained outperformance in defense stocks, a trend that accelerated after the war in Ukraine reshaped global security priorities.
Last year:
- European defense stocks nearly doubled
- U.S. aerospace and defense posted their strongest performance since 2013
- Governments worldwide committed to higher military readiness and missile defense programs
“The number is large, but the world is changing,” said Tony Bancroft of the Gabelli Commercial Aerospace and Defense ETF. “Geopolitical instability drives spending.”
Capital return limits raise new questions
Alongside higher spending expectations, Washington has signaled tighter scrutiny of defense contractors — including potential limits on dividends and stock buybacks.
Analysts see this as a manageable trade-off.
Morgan Stanley noted that reduced capital returns could redirect billions toward:
- Capacity expansion
- R&D
- Strategic acquisitions
However, uncertainty remains around:
- Congressional approval of budget increases
- The Pentagon’s ability to modernize procurement processes
- How aggressively oversight will be enforced
WSA Take
Defense is no longer a tactical trade — it’s becoming a structural allocation. Markets are pricing in a world defined by sustained geopolitical tension, higher military engagement, and long-duration government contracts. While policy details remain fluid, the direction of spending is clear: up and staying there.
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