Global Defense Stocks Surge as Geopolitical Tensions Escalate in 2026

The first ten days of 2026 have underscored one clear trend for investors across Europe and Asia: defense stocks are positioned for another strong performance this year.

In Ukraine, the conflict has intensified with renewed assaults as the war drags into another winter. However, it's the U.S. military operation in Venezuela to capture its leader, combined with Donald Trump’s repeated claims that the U.S. should control Greenland rather than NATO ally Denmark, that has most unsettled markets.

“This is a major wake-up call—relying so heavily on the U.S., a key ally, is no longer viable,” said Aneeka Gupta, director of macroeconomic research at WisdomTree. “Not only must defense investment increase, but it must accelerate significantly.”

A Goldman Sachs index tracking European defense companies has jumped 21% in January alone, reflecting rising investor confidence in elevated military budgets amid escalating geopolitical instability. This follows a 90% surge in 2025, with similar rallies also occurring in Japan, South Korea, and Taiwan this month.

Trump's proposal to increase the U.S. defense budget by $500 billion has further fueled gains in the sector globally, as non-U.S. companies anticipate benefits from this spending. A recent note by Bank of America strategist Michael Hartnett mentioned a conversation with a London investor who called defense “the strongest long-term investment theme across markets.”

Morningstar analysts predict that European defense stocks could see an average gain of 20% this year, though outcomes will depend on individual countries’ economic health and exposure to U.S. defense contracts. Analyst Loredana Muharremi noted that Trump's stance on Greenland is likely to speed up Europe’s pivot toward military self-sufficiency.

Germany, central to Europe’s defense spending strategies, has seen its top arms manufacturer Rheinmetall AG become a preferred stock. After soaring 150% in 2025, Rheinmetall shares have risen an additional 22% this month.

“If I could only hold one stock, it would be Rheinmetall,” said Vera Diehl, portfolio manager at Union Investment Privatfonds GmbH. She also identified Saab AB and Kongsberg Gruppen ASA as likely to benefit from the Greenland tensions, given their geographic proximity. “Trump’s aggressive posture suggests this is just the beginning,” she added.

The market rally has also encouraged major players in Europe’s defense industry to consider public listings. Czechoslovak Group AS, a producer of armored vehicles and munitions owned by billionaire Michal Strnad, is reportedly preparing for an IPO in Amsterdam as early as next week.

Defense themes are also dominating investor sentiment in Asia, as regional players anticipate a surge in export opportunities.

South Korea’s Hanwha Aerospace Co. leads the sector, up nearly 30% in January after tripling in 2025. Hyundai Rotem Co., another local defense contractor, has gained 16%. Taiwan’s Aerospace Industrial Development Corp. and Japan’s Howa Machinery Ltd. are among other notable performers.

“We’re optimistic about major defense firms, especially in South Korea, as they expand international sales to take advantage of booming global military demand,” said Weiheng Chen, global investment strategist at JPMorgan Private Bank.

Hanwha Aerospace and Hyundai Rotem are expected to secure significant contracts from countries like Iraq and Saudi Arabia, according to Cha So-Yoon, equity investment manager at Taurus Asset Management in Seoul.

U.S. defense companies are also gaining ground, with a Goldman Sachs index of American contractors rising 13% in January, on top of a 30% increase in 2025. However, enthusiasm has been tempered by Trump’s proposals to restrict stock buybacks and dividends in the sector.

Some analysts suggest those limitations could actually work in favor of European defense firms.

“Restrictions on capital returns may dampen investor interest in U.S. defense stocks, potentially giving an edge to their European counterparts,” said Alessandro Pozzi of Mediobanca, who pointed to BAE Systems Plc and Leonardo SpA as among the most exposed to the U.S. defense budget.

Still, challenges remain for the sector’s bullish outlook. A peace agreement in Ukraine could dampen sentiment, and there are concerns over high stock valuations: European defense shares have been rising much faster than earnings forecasts.

While 2025’s gains slowed in the latter half of the year due to delays in defense spending reaching company earnings, current sentiment suggests governments will need to significantly ramp up military investments as geopolitical threats intensify.

“Defense remains a fundamentally strong sector, provided nations stay committed to boosting autonomy and strengthening their defense capabilities,” said Fabien Benchetrit, head of target allocation for France and Southern Europe at BNP Paribas.