Not investment advice. This page is for informational and educational purposes only. Sterling is not a registered investment advisor. Nothing here is a recommendation to buy, sell, or hold any security. Markets carry risk and you may lose money. Do your own research and consult a licensed professional before making any investment, securities purchase, or trading decision.

Thesis

Why this sector matters to investors right now. Structural, not market timing.

Global defense spending entered a sustained upcycle in 2025 driven by Russia's ongoing war in Ukraine, the US Indo-Pacific posture toward China, and a structural realignment of European security policy. The Trump administration's FY2027 budget request to Congress is 1.5 trillion dollars in total defense spending (Defense Security Monitor April 28, 2026; GlobalSecurity.org), a 445-billion-dollar increase (~44 percent) over the FY2026 level of about 961.6 billion (Congress.gov R48860). NATO Allies agreed at the 2025 Hague Summit to invest 5 percent of GDP on defense and security by 2035, of which at least 3.5 percent against core defense capabilities (NATO; Atlantic Council). All Allies met or exceeded 2 percent in 2025 versus only three Allies in 2014. SIPRI recorded global military spending at the highest level in 16 years with European and Asian expenditures surging (SIPRI April 27, 2026; CNN). The structural transition is no longer hypothetical. The investible question is which categories of supplier capture which portion of the spend.

The primes are running at record backlog. Lockheed Martin closed 2025 with a 194-billion-dollar backlog on full-year revenue of 75 billion (Lockheed IR January 29, 2026). RTX reported Q4 2025 revenue of 24.24 billion against a record 268-billion-dollar total backlog. Combined top-five US prime backlogs exceed 700 billion, providing multi-year revenue visibility (Lockheed, RTX, Northrop Grumman, General Dynamics, Boeing disclosures). At the same time, a defense-tech cohort with software-and-autonomy economics has reached scale: Anduril closed a 2.5-billion-dollar Series F in June 2025 at a 30.5-billion-dollar valuation (more than double the prior round 10 months earlier), then won a 10-year US Army enterprise contract worth up to 20 billion dollars consolidating 120-plus prior Anduril contracts (Overt Defense March 24, 2026). Palantir secured an enterprise agreement worth up to 10 billion. Shield AI raised at a 5-billion-dollar-plus valuation with Palantir, Airbus, and Lockheed Martin as investors. The picks-and-shovels question, and the prime-versus-tech question, are the two structural choices for the next three to five years.

Structural drivers

Forces that shape long-run demand and economics. Each driver is sourced.

•US defense budget trajectory is record-setting. FY2026 enacted at ~961.6 billion dollars total (Congress R48860; GovConWire). FY2027 White House request of 1.5 trillion (Defense Security Monitor; GlobalSecurity.org) would be the largest single-year increase since the Korean War if enacted.
•NATO 5-percent GDP commitment by 2035 (3.5 percent core defense, 1.5 percent defense-related) represents a structural multi-decade demand pull on Western primes and defense tech (NATO Topic page; Intereconomics; SIPRI commentary).
•Germany's Zeitenwende is now structural, not emergency. Defense budget from 86 billion euros (2025) to 152 billion euros (2029), debt-brake amended in 2025 to enable the increase. Estonia targets 5 percent of GDP from 2026; Lithuania 5 to 6 percent (Small Wars Journal; Intereconomics; Atlantic Council).
•EU ReArm Europe Plan: 800 billion euros to 2029 including 150 billion in SAFE (Security Action for Europe) loans (European Parliamentary Research Service ATAG; Intereconomics).
•Defense tech cohort is winning enterprise-scale contracts. Anduril 20-billion-dollar 10-year Army enterprise contract (March 2026). Palantir 10-billion-dollar enterprise agreement. Anduril plus Palantir consortium building Golden Dome software (Jerusalem Post; Overt Defense; Govconwire).
•Golden Dome missile defense program announced January 27, 2025 by executive order. Space Force awarded 12 companies up to 3.2 billion dollars in OTA contracts for space-based interceptor prototypes (late 2025 to early 2026). Awardees include Lockheed Martin, SpaceX, Anduril, Northrop Grumman, True Anomaly (DefenseScoop April 24, 2026; Fortune). CBO estimates 1.2 trillion full program cost versus 185 billion Pentagon estimate.
•Munitions production is being structurally rebuilt. US 155mm artillery shell capacity rose from 14,400 per month pre-Ukraine to roughly 40,000 per month mid-2025, with a 100,000-per-month October 2025 target (National Defense Magazine; Army Times). New General Dynamics 50,000-per-month Camden plant; Repkon 435-million-dollar TNT facility in Kentucky.
•China military spending is on a 31-year continuous increase trajectory. 2025 official budget 1.78 trillion yuan (~244.8 billion dollars); 2026 budget 1.91 trillion yuan (~276.7 billion); SIPRI estimates 336 billion in 2025 (+7.4 percent year over year), making China the world's second-largest military spender (SIPRI press release April 27, 2026; ORF; Wikipedia). Xi's directive for PLA Taiwan readiness by 2027 anchors the Asia-Pacific procurement cycle.

Structural risks

Forces that could compress demand, change economics, or break the thesis.

•Defense spending is a political-cycle exposure. The 1.5-trillion-dollar FY2027 request is administration-stated; congressional appropriation outcome is uncertain. Historical procurement cycles have reversed (post-Cold War drawdown, post-Iraq sequestration). The current cycle has not yet been stress-tested by a major political turn.
•Replicator delivered hundreds, not thousands, of attritable autonomous systems by August 2025 versus the original target of thousands by that date (CRS IF12611; DefenseScoop September 3, 2025; Responsible Statecraft). The program has been renamed (DAWG) and refocused on larger drones and counter-sUAS. Defense innovation timelines remain slow even when funded.
•Munitions ramp is behind target. The US Army missed its 100,000-per-month October 2025 goal for 155mm shells (National Defense Magazine August 14, 2025). Ukraine consumes 5,000 to 7,000 shells per day (~2.1 million annually), exceeding even the post-ramp US production rate. Capacity build-out is multi-year and supply-chain constrained (TNT, propellant, machining bottlenecks).
•Defense-tech valuations are running ahead of revenue conversion. Anduril at 30.5 billion (June 2025), Shield AI at 5 to 5.6 billion (December 2025), Palantir commercial enterprise multiples high versus prime peers. Defense-tech revenue-to-valuation ratios are tighter than software comparables would suggest, with execution risk on multi-year programs.
•Golden Dome cost estimate range is enormous. Pentagon estimates 185 billion; Congressional Budget Office estimates 1.2 trillion total program cost (US News May 12, 2026). Cost overruns at this scale historically trigger congressional pushback and program restructuring.
•Shipbuilding capacity is severely constrained. US submarine production sits at about 1.2 Virginia-class boats per year against a stated requirement of about 2 per year; AUKUS Pillar 1 commits the US to deliver multiple Virginia-class boats to Australia from existing US production. The constraint is not money; it is workforce, supplier base, and shipyard throughput.
•Defense exports face new political and trade constraints. US, EU, and Asian export-control regimes are tightening on AI, semiconductors, and certain advanced platforms. SIPRI's top-25 arms-producer ranking shows shifts that reflect cross-border policy frictions.
•The 7-percent-of-revenue-or-more dividend cycle for legacy primes is a function of stable backlog. A program cancellation (F-35 block cuts, B-21 production rate changes, or Constellation-class frigate restart) could materially alter cash flow profiles. Backlog visibility is high; specific program risk is per-program.

Competitive landscape

How to think about the players. Framing along axes (pure play vs diversified, incumbent vs challenger, etc). Not stock picking.

The investible universe sorts into six archetypes.

1. US legacy primes. Lockheed Martin (FY25 revenue 75 billion, backlog 194 billion, F-35, missiles, space, Aegis). RTX (Q4 2025 24.24 billion, record 268 billion backlog, Patriot, NASAMS, commercial aerospace). Northrop Grumman (record 92.8 billion backlog Q1 2025, B-21 Raider, Sentinel ICBM, space). General Dynamics (submarines, M1 Abrams, business aviation). Boeing Defense (T-7, MQ-25, F-15EX, KC-46). L3Harris and Huntington Ingalls round out the core. Multi-year backlog visibility; mature dividend and buyback policy.

2. US defense-tech cohort. Anduril (30.5 billion valuation June 2025, 20-billion-dollar 10-year Army enterprise contract March 2026, Golden Dome software role, Bolt and Roadrunner drones). Palantir (10-billion-dollar enterprise agreement, AI/data integration). Shield AI (5 to 5.6 billion valuation, autonomous flight). Saronic (autonomous surface vessels). Hadrian (precision manufacturing for defense supply chain). Different unit economics from primes: software margins, faster iteration, smaller but rapidly compounding revenue base.

3. European primes. BAE Systems (UK, AUKUS Pillar 1, Eurofighter, naval). Airbus Defence and Space. Leonardo (Italy, helicopters, electronics). Thales (France, sensors, secure communications). Rheinmetall (Germany, 155mm, Leopard, structural beneficiary of Zeitenwende). Saab (Sweden, Gripen, AEW, ground combat). Beneficiaries of NATO 5-percent commitment and ReArm Europe.

4. Munitions and ground combat. General Dynamics Ordnance and Tactical Systems (155mm), RTX (Patriot, AMRAAM), Lockheed (HIMARS, GMLRS), Rheinmetall (155mm, Leopard tanks), Northrop (large-caliber, propellant). The munitions sub-sector is the cleanest near-term volume story.

5. Space defense. Lockheed Martin space, Northrop Grumman space, SpaceX (Golden Dome 600-satellite missile-targeting constellation contract reported), Anduril Space (SDA Tranche networking), L3Harris space, True Anomaly. Cross-links to the separate Orbital Data Centers sector.

6. Foreign primes outside US/Europe. Israel Aerospace Industries, Rafael, Elbit Systems (drones, missile defense, electronics). Mitsubishi Heavy Industries (Japan, building under Japan's defense build-up). South Korea (Hanwha, KAI, LIG Nex1). Turkey Baykar (Bayraktar drones). Differentiated end-market exposure.

Cross-cutting framing: legacy primes carry stable multi-year backlog visibility but mature growth; defense-tech carries higher growth and higher valuation multiples but execution risk; European primes carry the structural Zeitenwende tailwind; munitions carries volume-leverage exposure to ongoing conflicts; space defense overlaps with orbital infrastructure trends. The most concentrated risk is FY2027 appropriation outcome; the most concentrated opportunity is the defense-tech cohort if it converts venture-stage valuations to durable enterprise contract revenue.

Key metrics to watch

The operational and financial metrics that matter most in this sector. Each one names its source and update cadence.

Metric	Source	Frequency	Why it matters
US DoD annual budget authority and outlays	Congressional Budget Office, DoD Comptroller, Congressional Research Service (R48860 for FY26)	Annual budget cycle plus continuing resolution and supplemental events	Single largest demand-side variable. FY2026 ~961.6 billion enacted; FY2027 1.5 trillion requested. Final FY2027 enacted versus requested is the binary fiscal-year question.
Top-five US prime backlog and book-to-bill ratio	Lockheed Martin, RTX, Northrop Grumman, General Dynamics, Boeing Defense quarterly press releases and 10-Q filings	Quarterly	Combined backlog above 700 billion provides multi-year revenue visibility. Book-to-bill above 1.0 is the structural-health indicator.
NATO defense spending as percentage of GDP per country	NATO annual Defence Expenditure of NATO Countries publication, Atlantic Council NATO defense spending tracker, SIPRI Yearbook	Annual with mid-year updates	Tracks pace toward 5-percent commitment. 2025 baseline: all Allies meeting 2 percent. The structural multi-year tailwind for European primes depends on how fast countries close to 3.5 percent and 5 percent.
Defense-tech venture and growth-equity funding and valuations	Crunchbase, PitchBook, S&P Capital IQ, company press releases (Anduril, Palantir, Shield AI, Saronic, Hadrian)	Continuous (event-driven), quarterly synthesis	Anduril at 30.5 billion, Shield AI at 5 billion-plus mark the current ceiling. Whether new entrants reach 1-billion-dollar valuations and convert to government contracts is the cohort signal.
US 155mm artillery shell monthly production rate	US Army press releases, National Defense Magazine, Defense News and Defense One coverage, Repkon and General Dynamics OTS disclosures	Quarterly	The cleanest single-line measure of US industrial-base ramp. 14,400 per month pre-Ukraine to ~40,000 mid-2025 to 100,000 October 2025 target. Missing the target signals broader munitions-capacity constraint.
China official defense budget and SIPRI estimate	China Ministry of Finance budget reports, SIPRI press release April 27 each year, CSIS ChinaPower Project	Annual with revisions	Official 244.8 billion 2025 to 276.7 billion 2026 (+7 percent), SIPRI estimate 336 billion 2025 (+7.4 percent year over year). Pace of Chinese capability expansion sets the US Indo-Pacific procurement priority.
Golden Dome contract award and obligation cadence	US Space Force and Space Systems Command press releases, DefenseScoop and Fortune coverage, Congressional Budget Office cost estimates	Continuous (event-driven), quarterly synthesis	Highest-profile new US defense program of the cycle. 3.2 billion in early OTA contracts to 12 vendors as of early 2026. Production-contract awards 1.8 to 3.4 billion annually if program continues.
Ukraine and Israel conflict munitions consumption rates	Ministry of Defense disclosures, SIPRI arms transfers database, ICCT and CSIS munitions tracking	Quarterly	The active-conflict consumption rate determines minimum sustainable production. Ukraine 5,000 to 7,000 shells per day is the publicly cited baseline. Replenishment of European stockpiles is multi-year.

Catalysts and milestones

Known upcoming events that could move the sector. Dated where possible.

•US FY2027 defense appropriation outcome. White House request 1.5 trillion total. Congressional action through 2026. Source: Defense Security Monitor April 28, 2026; GlobalSecurity.org; Greenberg Traurig.
•NATO Hague Summit follow-on commitments at the 2026 NATO Summit. Allied national budget submissions through 2026 will test the 5-percent path. Source: NATO Topic page; SIPRI.
•Golden Dome design review milestones and first-tranche production contracts through 2027. Pentagon timeline targets 2028 fielding. Source: DefenseScoop April 24, 2026; Wikipedia Golden Dome; Lockheed Martin.
•AUKUS Pillar 2 milestone updates on Virginia-class submarine production and Australian crew training. Annual reviews continue. Source: Australian Department of Defence; CSIS AUKUS coverage.
•Anduril 10-year Army enterprise contract execution milestones. 20-billion-dollar ceiling, multi-year awards. Source: Overt Defense March 24, 2026; Anduril press releases.
•Palantir enterprise agreement task-order awards. 10-billion-dollar ceiling. Source: Palantir IR; Boston Globe May 6, 2026.
•US 155mm production milestones: pacing toward and beyond the 100,000-per-month target. Source: National Defense Magazine; Army Times; Defense News.
•China 2027 PLA modernization milestones tied to Xi's Taiwan-readiness directive. Source: CSIS China Power Project; SIPRI; Pentagon China Military Power Report.
•Ukraine war trajectory through 2026: ceasefire or escalation. Each scenario reshapes munitions and platform demand. Source: SIPRI; CSIS Russia Roadmap.
•Germany defense budget execution from 86 billion euros 2025 to 152 billion euros 2029. Source: Small Wars Journal; Intereconomics.

What would change the view

Conditions or evidence that would invalidate the thesis or materially shift the risk picture.

•US Congress fails to enact a FY2027 defense topline near the requested 1.5 trillion. Either a smaller appropriation or continuing-resolution slippage materially compresses contractor growth assumptions.
•A major Ukraine ceasefire and stockpile-replenishment plateau through 2026 to 2027. Munitions demand normalizes; European procurement slows from emergency pace to programmatic pace.
•A major program cancellation or restructuring (F-35 block cuts, B-21 production rate reduction, Constellation-class frigate program reset). Resets the prime backlog math.
•A defense-tech IPO at sub-2x last private mark. Would re-anchor the cohort's revenue-to-valuation expectations and likely slow venture pace.
•Anduril or Palantir loses a major contract competition to a legacy prime, or vice versa. The structural prime-versus-tech question becomes empirically testable.
•Golden Dome cost estimate further revised upward by CBO or GAO. Triggers congressional appropriation pushback.
•China military spending growth rate breaks the 31-year continuous-increase streak, or alternatively accelerates above 10 percent year over year. Either direction repositions the Indo-Pacific procurement priority.
•AUKUS Pillar 1 submarine deliveries fall materially behind schedule. The structural test of US industrial-base capacity.

What we are not covering

Sub-areas, technologies, or companies we are deliberately excluding from the analysis, and why.

•Commercial aerospace and airline-cycle exposure (Boeing Commercial Airplanes, Airbus Commercial). The Boeing and Airbus defense businesses appear here; the commercial aerospace cycle is a separate end market.
•Veteran services and military health (post-service rather than procurement).
•Military housing and base-services contractors. Operationally important but not procurement-cycle exposure in the same sense as platforms and munitions.
•Cybersecurity software firms whose government revenue is largely federal-civilian rather than DoD (Mandiant, CrowdStrike, Palo Alto Networks). Covered better under technology and cybersecurity coverage.
•Space launch providers as a standalone investment thesis (SpaceX, Rocket Lab, ULA, Blue Origin). Appear here as Golden Dome and SDA contractors only.
•Orbital data centers (Starcloud, Axiom Space, Lonestar). Covered in the separate Orbital Data Centers sector. Space-defense overlaps but each sector has its own scope.
•Civilian aviation MRO (engine maintenance, repair, overhaul). Adjacent but commercial-cycle exposure.
•Small arms and consumer firearms (Smith and Wesson, Sturm Ruger). Different end market and different regulatory framework.

Sources

Primary sources cited in this analysis. Links open in a new tab.

Congress.gov R48860: FY2026 Defense Budget Funding for Selected Weapon SystemsAccessed 2026-05-14
Wikipedia: Military budget of the United StatesAccessed 2026-05-14
GlobalSecurity.org: Department of War Releases FY27 BudgetAccessed 2026-05-14
Breaking Defense: FY26 defense bill boosts budget by $8BAccessed 2026-05-14
Council on Foreign Relations: Congress Approves 2026 US Defense BillAccessed 2026-05-14
Greenberg Traurig: Understanding FY 2027 Budget Request for Department of WarAccessed 2026-05-14
Defense Security Monitor: Pentagon's Historic $1.5 Trillion FY27 Budget RequestAccessed 2026-05-14
GovConWire: Trump Signs $901B FY 2026 NDAA Into LawAccessed 2026-05-14
NATO Topic: Defence expenditures and NATO's 5% commitmentAccessed 2026-05-14
NATO: Defence Expenditure of NATO Countries 2014 to 2025Accessed 2026-05-14
Atlantic Council: NATO defense spending trackerAccessed 2026-05-14
Intereconomics: Can Europe Deliver NATO's Five PercentAccessed 2026-05-14
Small Wars Journal: Germany's Military ReawakeningAccessed 2026-05-14
European Parliamentary Research Service ATAG on ReArm EuropeAccessed 2026-05-14
SIPRI: Global military spending rise continues 2026Accessed 2026-05-14
CNN: Military spending surges in Europe and AsiaAccessed 2026-05-14
SIPRI Commentary: NATO's new spending targetAccessed 2026-05-14
Tech Startups: Shield AI hits $5B valuationAccessed 2026-05-14
Fortune: Shield AI new CEO defense tech startup inflection pointAccessed 2026-05-14
CNBC: Shield AI 2025 Disruptor 50Accessed 2026-05-14
Overt Defense: US Army Awards Anduril $20 Billion AI Battlefield Tech ContractAccessed 2026-05-14
Jerusalem Post: Anduril, Palantir developing Golden Dome softwareAccessed 2026-05-14
Boston Globe: Trump's AI-driven military-industrial complex (Palantir contracts)Accessed 2026-05-14
GovCon Wire: Anduril $100M Space Force SDA Contract ModificationAccessed 2026-05-14
Lockheed Martin Q4 and FY2025 resultsAccessed 2026-05-14
FinancialContent: RTX Q4 record resultsAccessed 2026-05-14
Wikipedia: Military budget of ChinaAccessed 2026-05-14
ChinaPower CSIS: What Does China Really Spend on its MilitaryAccessed 2026-05-14
CSIS: China's Military in 10 ChartsAccessed 2026-05-14
ORF: Chinese Defence Budget 2025Accessed 2026-05-14
GlobalSecurity.org: Asian countries see largest annual rise in military spending since 2009Accessed 2026-05-14
National Defense Magazine: Army Falls Short of 155mm Production GoalAccessed 2026-05-14
Army Times: US Army ups ammo output with new 155mm loading plantAccessed 2026-05-14
Army Technology: US Army opens new artillery munition production siteAccessed 2026-05-14
Defense One: Army races to widen artillery shell production bottlenecksAccessed 2026-05-14
Congressional Research Service IF12611: DOD Replicator InitiativeAccessed 2026-05-14
DefenseScoop: DOD touts Replicator successful transitionAccessed 2026-05-14
Breaking Defense: Replicator lives on as DAWGAccessed 2026-05-14
Responsible Statecraft: DoD attack drones still waitingAccessed 2026-05-14
Wikipedia: Golden Dome (missile defense system)Accessed 2026-05-14
DefenseScoop: Space Force names 12 companies for Golden Dome space-based interceptorsAccessed 2026-05-14
Fortune: SpaceX, Anduril among companies to win Golden Dome contractsAccessed 2026-05-14
US News: Budget watchdog estimates Golden Dome will cost $1.2 trillionAccessed 2026-05-14
Lockheed Martin Golden Dome capability pageAccessed 2026-05-14

Audit trail

Record of the last review and what changed. Required on every refresh.

Last reviewed: 2026-05-14

Change log

2026-05-14Initial publication. All ten required SOP components populated using sourced 2025 full-year and 2026 year-to-date data. Primary sources: US DoD FY26 NDAA via Congress.gov R48860 and GovConWire; FY27 budget request via Defense Security Monitor, GlobalSecurity.org, Greenberg Traurig; NATO Defence Expenditure publication and Atlantic Council tracker; SIPRI annual press release April 27, 2026 and commentary; Lockheed Martin, RTX, Northrop Grumman quarterly press releases; Anduril and Palantir disclosures via Overt Defense, Fortune, Jerusalem Post, Govconwire, TechStartups; Shield AI via Tech Startups, Fortune December 21, 2025, CNBC; Replicator via CRS IF12611, DefenseScoop, Responsible Statecraft, Breaking Defense; Golden Dome via DefenseScoop April 24, 2026, Fortune, US News May 12, 2026, Wikipedia; 155mm production via National Defense Magazine, Army Times, Defense News; China military spending via SIPRI, ORF, CSIS, Wikipedia. All sources accessed 2026-05-14.

Unresolved questions

•FY2027 US defense appropriation outcome versus the 1.5-trillion-dollar request. Single largest top-line variable.
•Whether NATO Allies translate the 5-percent commitment into binding national budget legislation through 2026 and 2027, or whether actual spending materially trails the commitment.
•Golden Dome production-contract sequencing and total program cost convergence (between 185-billion-dollar Pentagon estimate and 1.2-trillion-dollar CBO estimate).
•Anduril and Palantir enterprise-contract task-order conversion to recurring revenue. Ceilings are public; actual obligations and bookings are not.
•Whether US 155mm production reaches 100,000 per month and at what fiscal year. The cleanest single-line industrial-base indicator.
•AUKUS Pillar 1 Virginia-class delivery to Australia versus US submarine fleet readiness. The structural test of US shipbuilding industrial capacity.
•Ukraine conflict trajectory through 2026 and 2027. Ceasefire versus escalation versus frozen-conflict outcomes each reshape European defense demand differently.