Defense Companies in 2026 – Who stands to gain or lose?

Trump Targets Weapons Production – Is There Something to Fear?

Within the U.S. presidential administration, resentment is growing toward yet another industry that until now has traditionally been treated as a priority, or even as a kind of “sacred cow.” The conflict involves President Donald Trump and a number of senior military officials, including the U.S. Secretary of the Navy. Attention in the White House and the Pentagon has been drawn to the practice of share buybacks by defence contractors instead of undertaking capital investment. Officials suggest that companies are misallocating capital.

The “big three” of the U.S. defence industry: Raytheon, Lockheed Martin, and Northrop Grumman - have allocated exceptionally large sums to share repurchases. Between 2022 and 2024, this amounted to nearly USD 40 billion.

This is typically the preferred method of distributing profits to shareholders due to tax advantages. Dividends are taxed immediately as income, whereas buybacks defer taxation until the shares are sold, at which point tax is paid only on capital gains. At this point, however, a serious conflict of interest emerges. The interests of companies and shareholders do not align with the national interest. Maximizing production does not mean maximizing profits and, more often than not, means the opposite. In markets with high barriers to entry, scarcity can allow companies to earn more by producing less than they are capable of. Such a situation, however, does not serve the interests of the U.S. government.

Despite record profits in 2022–2024, driven by the war in Ukraine, a series of conflicts in the Middle East, and more or less successful programs to modernize or expand the U.S. armed forces, the sector continues to suffer persistent failures, reports repeated delays, and routinely exceeds already massive budgets.

Averaging the figures from recent years:

• Lockheed Martin spent as much as 70% of its net profit on share buybacks.
• RTX Corp. spent around 80% of its net profit.
• Northrop Grumman spent roughly 45% of its net profit on share repurchases.

These figures do not include dividends, which represent a large, significant, and separate method of compensating shareholders. Sharing the Pentagon’s concerns, the sums involved are enormous and the directions of cash flows are troubling.

The U.S. government argues that, in the face of disappointing production levels and constant delays, this capital should instead be allocated to expanding production lines, R&D, and wages. While at first glance such a drastic change in shareholder remuneration policy appears to be sharply at odds with shareholder interests and could prompt them to punish company valuations, in the long term the companies themselves may benefit. This stems from the fact that neglect and stagnation at the largest firms have reached levels at which they pose a significant threat to their continued operation and growth.

It is worth remembering, however, that this is not a one-sided policy. Just days after announcing his intention to revise dividend and share buyback policies, Trump also signalled a radical increase in defense spending. It remains to be seen whether this “carrot and stick” strategy will prove effective.

The US Military–Industrial Complex: Neither a “Complex” nor “Industrial”

The valuations of U.S. defence companies themselves reflect structural problems affecting both the industry and the United States as a whole. Valuations have failed to keep pace with the broader market and remain well behind their European counterparts. What lies behind this divergence, and how could a shift in government policy affect defense-sector valuations?
 

Source: Bloomberg Intelligence

U.S. defence companies and related entities (such as Boeing, Texas Instruments, and General Dynamics) are firms that, by their own choosing, have lost their industrial and human-capital base. The discipline and management culture that once built them has eroded. These companies are also increasingly forced to operate within a landscape of neglected infrastructure and unstable supply chains. As a result, both investors and the U.S. government are viewing them with growing scepticism. Defence contractors into which the United States (and others) have poured hundreds of billions of dollars over the past decade and a half are proving unable to meet even the basic needs of the armed forces.

At the same time, their European counterparts are multiplying production capacity and forming new consortia to develop successive systems, despite high-energy prices, labor costs, and limited access to many raw materials. Why, then, is the United States (despite seemingly favourable conditions) unable to restore its defence industrial base?

The first problem most often cited by representatives of these companies is a “lack of labor.” Without experienced engineers and skilled trades people, expansion or even the maintenance of production - is impossible.
The core issue, however, is that companies claim to lack engineers even though the labor market currently has more unemployed engineers (or graduates in general) than at any point in recorded history. At the same time, corporate leadership lobbies for immigration reform to attract supposed specialists from abroad.

This is not a solution. Work on military programs requires access to materials at varying levels of classification, and the process of obtaining security clearances is arduous and time-consuming—even for native U.S. citizens. Boeing carried this strategy to its logical conclusion, enabled by its large exposure to civil aviation, where such clearances are not required. The consequences of this policy are visible not only in the company’s valuation but also in the list of aviation disasters of recent years. These companies could readily recruit and train engineers already available in the market; they do not do so because of deep-seated dysfunctions and the insular nature of these organizations, thereby generating losses not only for the U.S. budget but also for shareholders.

The second group of problems is far more complex and cannot be addressed through changes in recruitment policy. As a result of deindustrialization, deregulation, outsourcing, and privatization, the United States has allowed large parts of its logistics and industrial infrastructure to fall into disrepair, while many technical capabilities have been partially or entirely lost.

Without years of consistent and well-designed investment, it is impossible to make up for these shortcomings, and the backlog the U.S. faces continues to grow. Today, one can observe a reversal of the situation from the Pacific theater of World War II. Despite its current, clear, and overwhelming superiority at sea and in the air, the United States may, within a few years, be forced to confront the prospect of a war of attrition against an adversary that controls more than 50% of global shipbuilding capacity (China).

In addition, the U.S. is likely to face an energy crisis on a scale comparable to, or even greater than, that experienced in Europe if plans to expand data centers move forward. Defense companies and their subcontractors will be forced to compete for energy with technology firms, a scenario that would end disastrously for all parties involved.

It is therefore time to turn to European manufacturers. Is such a stark difference in valuations and metrics merely the result of geographic proximity to the Russian threat and a series of self-inflicted failures by the American industry? Not entirely.

Behind the success of European defense lies something that until recently was considered its greatest weakness. Nearly every country in Europe needed to preserve at least part of its domestic capacity to produce military equipment, even during periods of historically low defense spending. This created a mosaic of small but efficient and highly specialized companies, sharing the market with a handful of industrial conglomerates whose histories stretch back to the 19th century.

In the United States, the transformation moved in the opposite direction: most smaller contractors were consolidated into a small group of corporations that became “too big to fail.” Today, European companies cooperate where they must and compete where they can, which drives continuous growth in capabilities and productivity. The single market and extensive infrastructure allow for rapid scaling of production and design capacity, despite the burden of high-energy prices and labor costs.

“Quo Vadis” or “Para Bellum”?

Who, then, stands to benefit from the trends currently unfolding, and is it possible that investment opportunities exist on both sides of the Atlantic? Investing in defence suppliers is difficult, despite outstanding returns and solid fundamentals. Investing in European manufacturers is even more challenging. On the one hand, most EU market leaders are already trading at very elevated levels, often with triple-digit P/E ratios. On the other hand, these companies are subject to regular and entirely unjustified sell-offs triggered by meaningless “peace negotiations,” which—regardless of their outcome—do nothing to change corporate fundamentals. Still, there remain European companies that the market has largely ignored, despite the fact that it should not have.

Kongsberg

The Norwegian producer of air-defence systems has lagged in valuation gains, despite ambitious expansion plans and consistent growth. The company plays a critical role in the EU security architecture, given the central role that the bombing of civilian populations plays in Russia’s conduct of warfare. Kongsberg is posting revenue growth of around 50% year over year, with a rising book-to-bill ratio of approximately 1.4. EBIT margins currently stand at about 12%, but due to operating leverage and the step-change growth the company is planning, these figures could rise quickly. Today, the company is one of the most compelling opportunities in the sector. It remains “under the radar” for much of the market, and there are strong indications that its largest gains may still lie ahead.

KOG.NO (D1)

The company is beginning to more confidently recover losses incurred during the correction in the second half of 2025. Source: xStation5

Saab Group 

Saab is another company, also from Scandinavia, that, despite being one of the many beneficiaries of Europe-wide rearmament, has remained outside the main focus of investors. Saab’s position is unique: for decades it formed the backbone of Sweden’s relatively self-sufficient defense industry. As a result, Saab offers its customers diversified and integrated solutions that cover most of the needs of armed forces that value independence and a strong price-to-performance ratio.

The Swedish manufacturer maintains one of the fastest revenue growth rates in the industry, exceeding 20%, while simultaneously sustaining margins several percentage points above those of its peers. The company was already a leader in supplying top-tier equipment to countries outside NATO. Accession to the alliance opens up new markets, while investments made as part of pan-European initiatives will allow Saab to increase production and benefit from greater economies of scale, strengthening its position with existing customers.

Despite the litany of challenges, the situation of U.S. defense companies is neither hopeless nor even dire. While prime contractors are grappling with problems that clearly exceed the capabilities of their boards and executive teams, a second tier of companies remains that is capable and ready to fully benefit from the world’s largest defense budget—and whose valuations still have substantial room to move higher.

SAABB.SE (D1) 

The Swedish company is currently in a phase of a very strong upward growth trend. Source: xStation5

L3Harris

L3Harris is a manufacturer of missile systems. It is a company that is less well known and less visible in the media than the larger players in the market; however, it is an entity that is not only indispensable but also boasts some of the strongest growth prospects in this segment of the equity market. L3Harris holds a practical monopoly on solid-fuel rocket motors for tactical missiles. This monopoly stems primarily from the extremely demanding certification process. It is clearly and positively reflected in the company’s financial metrics.

The company can point to some of the highest EBIT margins in the industry, exceeding 15%. L3Harris is also a leader in cost optimization. Its “LHX NeXT” initiative delivered USD 800 million in savings in 2024, compared with an initial target of USD 600 million. By the end of the current year, total savings are expected to reach as much as USD 1.2 billion. At the same time, the company continues to trade at a forward P/E discount relative to the rest of the sector.

L3Harris does not rely solely on optimization or on harvesting cash flows from existing contracts. One of the flagship projects of the Donald Trump administration is the so-called “Golden Dome,” a complex, layered missile-defense system. Regardless of the strategic merit or feasibility of this initiative, the funding behind it is very real. The project could be worth as much as approximately USD 140 billion, a significant portion of which may accrue to L3Harris due to its indispensable role in this segment.

L3Harris embodies everything that companies in this sector should aspire to—and that only a few actually achieve. Most importantly, this has yet to be fully reflected in valuations.

LHX.US (D1)

The company has been in an almost uninterrupted upward trend since March 2025. It is worth noting the crossover of the EMA100 and EMA200. Source: xStation5

Huntington Ingalls Industries (HII)

HII is also a company that lacks the media and analyst coverage enjoyed by the largest players by market capitalization, yet it is just as indispensable within the supply chain—and given the current priorities of the U.S. armed forces, its role is set to grow steadily. The U.S. Navy is currently in an increasingly urgent phase of efforts to expand, maintain, and modernize its fleet. All indications suggest that the primary beneficiary, in terms of equity valuations, will be HII.

Like L3Harris, HII is a monopolist. The company operates the only port/shipyard in the United States capable of constructing and maintaining so-called “super carriers”—gigantic, ultra-advanced vessels that form the backbone of U.S. military power. In addition, the company operates one of only two shipyards capable of building and servicing multi-role nuclear-powered vessels. Unlike, for example, Boeing or General Dynamics, these critical dependencies are not a floor that merely prevents HII from falling further; instead, they act as a catapult for another wave of growth.

The company’s financial metrics are not as impressive as those of L3Harris or parts of the European competition, but HII remains a clear growth leader. Revenue growth of 16% year over year, an 85% increase in earnings year over year, and a margin expansion from 3.5% to 5.6%. The company also does not appear to be struggling with labor shortages: in this year alone it hired an additional 4,500 employees to execute a record order backlog totalling USD 55 billion.

The U.S. Navy’s modernization plans are enormous. They include the targeted construction of at least two additional Ford-class aircraft carriers, several Virginia-class submarines, and dozens of destroyers and support vessels. The shipbuilding budget has nearly doubled since 2021, and since 2015 Congress has allocated more funds for this purpose each year than requested by the president. Based solely on analyses of congressional reports from 2024–2025, this could translate into hundreds of billions of dollars in contracts over a roughly ten-year horizon.

HII.US (D1)

The situation is analogous to the L3Harris chart, although the upward trend is several months longer. Source: xStation5

Conclusion:

Analysing the current trends in the defense and military equities market, several clear observations emerge:

• The U.S. defense industry, despite how it is perceived by the market and commentators, is increasingly falling behind its European competitors.
• This does not apply to all U.S. companies. Some smaller, less media-visible but more efficient firms—capable of fully leveraging their strategic positions—remain at the forefront of valuation growth.
• The European defense industry has proven to be a “sleeping giant” that has awakened in response to rising threats and pressure.
• Valuations of most European defense companies have caught up with market fundamentals or even moved ahead of them, yet investment opportunities still remain in the shadows.

Source: Bloomberg Intelligence

Kamil Szczepański
Junior financial markets analyst at XTB