Defence and defence stocks: how yesterday's taboo became the “new normal” in 2026?

In the investment world, there are few sectors that evoke as much emotion as the defence industry. Until a few years ago, arms manufacturers“ shares were considered ”scapegoats" (sin stocks), lumping them together with tobacco, alcohol and gambling companies. Ethical pension funds and banks excluded them from their portfolios, claiming that they did not comply with the ESG (environmental, social and governance) criteria.

But then the world changed.

After the events of 2022 in Ukraine and the geopolitical earthquake that followed, Europe has awakened to a new reality. In January 2026, we will no longer be talking about the defence industry as an “instigator of war”, but as the backbone of democracy and the economy.

For the investor, a unique situation has arisen: there is an ongoing nationally guaranteed super-cycle. NATO countries are pumping billions of euros into rearmament and that money has to go somewhere.

In this article, we analyse whether the rally in the defence industry is already over, or is it just beginning? How to invest ethically in this sector and which companies are the new cornerstones of the European security architecture?

Paradigm shift: “Weapons are peace”

To understand why money is flowing into this sector, we need to understand a fundamental shift in thinking.

For decades, Europe enjoyed a “peace dividend”. After the end of the Cold War, countries cut their public budgets, channelling money into social welfare and infrastructure. Tanks rusted, ammunition depots were half empty. The logic was simple: there would be no more big war in Europe.

Today, the situation is the opposite. The “peace dividend” has been replaced by “security tax”.

Even the most liberal governments and ESG analysts are forced to acknowledge the new truth: Sustainability (greening, social well-being) cannot exist without physical security. When a country ceases to be free, it no longer matters how green its energy balance is.

This has led to a massive flow of institutional money (pension funds, sovereign wealth funds) back into the sector. Defence companies are now “socially necessary” because they produce deterrence (deterrence).

Economic logic: the anatomy of the supercycle

Why do analysts think the sector will still be attractive in 2026, even though share prices have already risen significantly over the past three years?

The answer lies in the time and volume of orders. The defence industry is not like iPhone sales, where demand can disappear overnight. Contracts are signed 5-10 years in advance.

1. NATO 2% is a new floor, not a ceiling.

For years, NATO's requirement that member states contribute 2% of GDP to national defence was only indicative. In 2026, it will be the minimum standard. Many Eastern European countries (including Estonia, Poland) are already contributing more than 31TTP3T. Even large Western European countries such as Germany and France are in a forced situation where they have to increase spending to modernise their forces. This means a stable and growing cash flow to defence companies for years to come.

2. Stocks take years to fill

Helping Ukraine emptied Western ammunition depots. The restocking of these stocks will not happen overnight. Production lines are booked until 2030 and beyond. This gives companies (like Rheinmetall or Nammo) extraordinary confidence in future turnover. Usually, the problem with cyclical stocks is that we don't know what the next year will bring. The order books are thick with them here.

3. The technological leap

Warfare has changed. Tanks and artillery have been replaced by drones, electronic warfare (EW - Electronic Warfare) and cyber defence. This opens the door not only to the old majors, but also to new tech companies.

Where to invest? Sector overview

In 2026, the investor will have several different strategies on the table, depending on risk tolerance and regional preference.

European hills: Right in the middle of events

Europe's defence industry is fragmented, but it is here that the fastest growth is taking place, as the European Union tries to achieve “strategic autonomy” from the US.

• Rheinmetall (Germany): Probably the best known name in European rearmament. They produce everything from ammunition to tanks (Leopard 2, Panther). Their stock has been going through a tremendous upswing, but the volume of orders still supports a high value.
• SAAB (Sweden): Sweden's accession to NATO opened new doors for SAAB. Their Gripen fighters and NLAW anti-tank systems are world class. In addition, SAAB is strong in electronic surveillance (GlobalEye), a key component of modern warfare.
• Thales (France): Less “iron and gunpowder”, more “brains and chips”. Thales is a major player in defence electronics, radars and cyber security. As wars become more digital, Thales is well positioned.
• BAE Systems (UK): Europe's largest defence industry company. A very broad portfolio (aircraft, ships, ground forces). Stable dividend payer and less volatile than Rheinmetall.

USA's “Big Five”: safe harbour

The US remains the undisputed global leader. Its companies are massive, have huge economies of scale and are often less influenced by European political drift.

• Lockheed Martin: The largest in the world. The world's largest manufacturer of F-35 fighters. It's like the defence industry's “Coca-Cola” - boring, stable, pays dividends.
• RTX (formerly Raytheon): They produce the Patriot missile systems that the whole world wants to buy now. At the same time, they have a large civil aviation arm (Pratt & Whitney engines) which balances the risks.

New entrants: cyber and drones

2026. The investor of the year is also looking beyond the “iron asset”.

• Palantir Technologies: Although a software company, their data analysis software has become indispensable to the intelligence agencies of the US and its allies.
• AeroVironment: The largest US manufacturer of small reconnaissance and attack drones (Switchblade). Drones have made warfare cheap and deadly, and demand for them is exploding.

How to invest? Individual shares vs. ETF

As mentioned in previous articles, investors have a choice between stock picking and funds. In this sector, this choice is particularly important because political risk is high.

Risk: In the case of an individual share (e.g. Rheinmetall), you depend on the decisions of the German government. If the government decides to suspend the export license for whatever reason, the stock will drop like a stone.

Solution: sector ETFs (Index Funds) There is a small catch for the Estonian investor. Many popular US defence ETF-(such as the iShares U.S. Aerospace & Defense ETF - ITA) are not available to the European retail investor (there is no KIID).

Fortunately, very good alternatives (UCITS ETFs) will have emerged on the European market by 2026:

1. VanEck Defense UCITS ETF (DFNS): It is probably the most popular choice in Europe. The fund invests in companies that generate most of their income from protection. The portfolio includes both US and European players (Thales, Leonardo, Saab). It is a “buy and forget” solution to cover the sector.
2. HANetf Future of Defence UCITS ETF (NATO): Yes, the stock exchange symbol is NATO. This fund focuses more on technology and NATO allies, excluding, for example, certain controversial weapons.

Risks: What you need to know?

It would be irresponsible to talk only about profits. The defence industry is a high-risk sector, although the risks are different from technology companies.

1. A political kite: The defence industry's only customers are governments. Governments change. If a more pacifist coalition comes to power, or if a major peace deal is signed (which is best for humanity, of course, but “bad” for investors), stocks can fall 20-30% quickly.
2. Valuation: Many defence stocks will trade close to historic highs in 2026. P/E ratios are high. This means that the “good news” is already factored into the price. Any slight disappointment in earnings could lead to a sharp sell-off.
3. Supply chains and workforce: The money is there, the orders are there, but are there any takers? Europe's engineering drought and the availability of raw materials (e.g. titanium, special steel) are bottlenecks. If Rheinmetall cannot produce as many missiles as promised, the share price will suffer.

An ethical dilemma: Do I profit from war?

This is a question every investor must answer in front of a mirror. It is perfectly normal if you decide not to invest in this sector. Many investors still feel that they do not want to make a profit from the sale of weapons designed to kill.

The second perspective, which will be more predominant in 2026, is. “democracy insurance policy”. By investing in the Western defence industry, you give capital to companies that produce shields against authoritarian regimes. The war in Ukraine showed painfully what happens when a democratic country does not have enough arms to defend itself. In this light, an investment in Saab or Rheinmetall is an investment in ensuring that we will continue to have a free economy and a stock exchange on which to trade.

Summary: The new normal

The defence industry has come out of the shadows and now sits at the head of the table. It is no longer a niche sector for the war-loving, but a strategic component of the global economy.

2026. Investor's reminder for the year:

• The sector is growing: The increase in NATO spending is a long-term trend.
• Scatter the risks: Use ETFs (such as VanEck Defense) to avoid political risks in individual countries.
• Don't buy on emotion: Don't buy a share when there are “anxious headlines” in the news. Buy when it's quiet and long-term plans are being made.
• Think about your ethics: Make sure this investment is in line with your values.

The year 2026 has proven that peace is not free. And where countries pay a price for peace, investors have an opportunity to participate in capital growth.