Sector Watch: Why Defense Stocks Are Surging — Geopolitical Catalysts, NATO Spending, and the Sectors Investors Are Watching
Defense stocks are having a remarkable run. Lockheed Martin, Northrop Grumman, RTX Corporation, General Dynamics, Boeing, and L3Harris Technologies are all trading near their 52-week highs, with some names up more than 80% from their lows over the past year. The rally is not happening in a vacuum — it is being driven by a convergence of geopolitical flashpoints that are forcing governments worldwide to accelerate military spending. The catalysts are stacking up. President Trump used his record-long 2026 State of the Union address to issue direct warnings to Iran and signal continued defense spending priorities. Japan announced plans to deploy missiles on islands near Taiwan by 2031, prompting immediate Chinese retaliation through export restrictions on 40 Japanese entities with military ties. Europe, marking four years since Russia's invasion of Ukraine, is debating the creation of a unified EU military force as NATO members scramble to meet the 2% GDP spending target. For investors, the question is whether these tailwinds are already priced in — or whether the defense sector still has room to run. With the six largest U.S. defense contractors now commanding a combined market capitalization exceeding $867 billion, understanding the fundamentals behind the rally is essential for anyone considering exposure to the sector.