Defense & Space Stocks: Long-Term Investment Outlook Amid Rising Global Tensions

This analysis examines the defense and space sector investment thesis following the January 7, 2026 discussion featuring Paul Marino, Chief Revenue Officer at Themes ETFs, and Daniel Maguire, Autonomous Technology & Robotics Research Analyst at ARK Invest [1]. The analysts express long-term bullish views on defense and space stocks, citing elevated U.S. and NATO military spending and strategic shifts toward drone technology and satellite systems as primary catalysts. The defense sector has demonstrated exceptional performance, with the S&P 500 Aerospace & Defense Index gaining 53.52% over the past year, significantly outperforming the broader market [5]. Combined with multi-billion dollar initiatives including the “Drone Dominance” program and “Golden Dome” missile defense system, the defense technology sector presents a multi-year secular growth opportunity positioned at the intersection of autonomous systems, space capabilities, and next-generation manufacturing.

The defense sector is experiencing an unprecedented multi-year spending expansion driven by geopolitical instability and strategic realignment. The U.S. Department of Defense’s FY2026 budget request stands at $961.6 billion, representing a 13.4% increase over FY2025 [2]. When supplemented by the additional $150 billion in defense investments from the One Big Beautiful Bill Act, total U.S. military allocations exceed $1 trillion for 2026 [3].

NATO commitments are adding further momentum to this spending trajectory. NATO nations have agreed to raise defense spending from the current 2% GDP target to 5% by 2035 [4]. If fully implemented through traditional defense procurement, this would require the U.S. defense budget to grow by approximately 40%—roughly $400 billion annually—by 2035. This structural shift in allied defense commitments creates a sustained multi-decade demand backdrop for defense contractors and technology providers.

The sector’s performance reflects investor recognition of these fundamental shifts. Major defense stocks delivered exceptional 2025 returns, with GE Aerospace and RTX both advancing more than 50% [6]. This outperformance extends beyond individual companies to the broader defense ETF market, with assets under management in major aerospace and defense funds reaching record levels as institutional and retail investors seek exposure to this structural growth theme.

A fundamental transformation is reshaping defense procurement priorities, creating a divergence between agile, technology-focused companies and their slower-moving legacy peers. The global shift toward asymmetric warfare—where relatively inexpensive drones can disable expensive armored vehicles—has forced the Pentagon to radically alter spending habits [7].

The U.S. Army has requested approximately $803.9 million in FY2026 funding for small unmanned aircraft systems supporting intelligence, surveillance, reconnaissance, target acquisition, strike, and electronic warfare operations [8]. More significantly, the War Department announced plans to acquire over 300,000 drones through the “Drone Dominance” program, funded by $1 billion from the Big Beautiful Bill. The initial phase (February-July 2026) targets 30,000 drones at $5,000 per unit, scaling to 150,000 drones at $2,300 per unit in later phases as production efficiencies are realized [9].

The FY2026 National Defense Authorization Act advances this agenda by establishing the sUAS Industrial Base Working Group, authorizing the Eastern Regional Range Complex for Multi-Domain Operations and Robotic Autonomous Systems Training, and creating partnerships to strengthen counter-drone resilience across armed services [10]. These policy initiatives formalize the military’s commitment to autonomous systems and create structured opportunities for technology companies to participate in defense procurement.

The “Golden Dome for America” missile defense program represents another major structural shift in defense spending priorities. This initiative, with an expected $151 billion contract structure over 10 years, aims to develop space-based missile defense capabilities [11]. The Commercial Augmentation Space Reserve will transition to full-scale operations in 2026, targeting 20 contracts by year-end to provide wartime access to commercial satellite communications networks, backed by record fiscal 2026 funding approaching $40 billion [12].

The space domain has emerged as a critical arena for national security, driving investment in satellite manufacturing, launch services, space situational awareness, and on-orbit operations. Companies positioned in these segments benefit from both direct government contracts and the broader commercialization of space infrastructure that supports defense applications.

The strategic pivot toward high-tech defense platforms has decoupled agile, technology-focused mid-cap companies from their slower-moving legacy peers. Investors are increasingly valuing these firms based on growth potential and technological disruption rather than traditional metrics like cash flow and dividends [7].

Key beneficiaries identified across the defense technology value chain include Kratos Defense (KTOS), positioned for Golden Dome and hypersonics programs with a first-to-market strategy for lower-cost advanced platforms; AeroVironment (AVAV), specializing in small UAS and loitering munitions as a Drone Dominance program beneficiary; L3Harris Technologies (LHX), with exposure to space, electronics, and communications modernization programs; Lockheed Martin (LMT), leveraging traditional prime contractor strength in aviation, space, and missiles; and RTX Corporation, which saw over 50% stock appreciation in 2025 [13].

The defense ETF landscape has expanded significantly to capture investor demand. The iShares U.S. Aerospace & Defense ETF (ITA) maintains a $13.26 billion asset base as the largest fund in the category, while the State Street SPDR S&P Aerospace & Defense ETF (XAR) offers a low-cost option at 0.35% annual fee [5]. The Themes Transatlantic Defense ETF (NATO) focuses specifically on NATO-aligned defense companies, and the Global X Defense Tech ETF (SHLD) provides technology-focused defense exposure for investors seeking pure-play autonomous systems exposure.

The defense investment thesis derives strength from the convergence of two powerful, mutually reinforcing drivers. Geopolitical tensions—encompassing great power competition, regional conflicts, and alliance restructuring—create sustained demand for military capabilities. Simultaneously, technological breakthroughs in autonomous systems, artificial intelligence, and space-based platforms are redefining how defense capabilities are delivered and measured.

This convergence creates a particularly favorable environment for companies that can bridge both trends: organizations capable of delivering proven technology at scale while maintaining the innovation velocity required to address emerging threats. The Pentagon’s demonstrated willingness to accelerate procurement timelines and embrace commercial technology partnerships opens opportunities for non-traditional defense contractors while increasing competitive pressure on established players.

The sUAS industrial base is receiving unprecedented attention from policymakers and defense procurement officials. The FY2026 NDAA establishes working groups to analyze the small UAS supplier base and recommend investments, with particular focus on battery systems and the Army’s SkyFoundry initiative [10].

This policy focus creates opportunities for advanced battery and energy storage manufacturers, semiconductor and sensor suppliers, lightweight materials producers, and software developers specializing in autonomous systems. The scale of the Drone Dominance program—potentially requiring production of over 150,000 drones annually—demands industrial base expansion that benefits component suppliers across the value chain. Companies positioned as advantaged suppliers amid defense and space reshoring efforts may capture disproportionate value as domestic production requirements accelerate.

Defense tech stocks trade near historical highs following the sector’s strong 2025 performance, raising questions about future return potential. However, the structural nature of the spending increases—driven by multi-year budget commitments rather than temporary stimulus—may support elevated valuations. The sector’s decoupling from traditional value metrics toward growth-oriented valuation frameworks reflects investor expectations for sustained earnings acceleration rather than cyclical recovery.

European defense equities have also regained investor confidence, with the STOXX Europe Total Market Aerospace & Defense Index reversing its October-December 2025 decline in early December, driven by fading hopes of a Ukraine-Russia peace deal and regional rearmament trends [5]. This synchronized recovery across both U.S. and European markets suggests broad-based institutional recognition of the defense sector’s structural growth characteristics.

: Defense spending remains subject to political dynamics, and potential policy shifts could affect program priorities or budget allocations. The incoming administration’s defense priorities may differ from current implementations, creating execution uncertainty for programs like Golden Dome.

: Competing spending priorities—including infrastructure, social programs, and debt service—could limit defense budget growth below projected levels. The $1 trillion+ defense budget already represents a significant fiscal commitment that may face political resistance.

: Critical component dependencies, particularly in semiconductors and batteries, create supply chain risks that could constrain production scaling or increase costs. The requirement to rapidly scale drone production may expose bottlenecks in specialized component manufacturing.

: Following strong 2025 performance, defense tech stocks trade at premium valuations that may not fully account for execution risks or potential policy changes [13]. Market corrections affecting growth-oriented sectors could disproportionately impact defense technology stocks.

: The Venezuela military operation and ongoing geopolitical tensions provide immediate catalysts, with defense stocks demonstrating positive reactions—Northrop Grumman gaining 4.4%, Lockheed Martin advancing 3.0%, and RTX Corporation rising 0.6% following operation announcements [5]. The first phase of the Drone Dominance program launching in February 2026 will provide early signals for contract winners and supply chain participants.

: Global defense spending is projected to top $3.6 trillion by 2030, representing approximately 33% growth from 2024 levels [5]. Key milestones including Golden Dome contracting, Commercial Augmentation Space Reserve scale-up, and Drone Dominance program delivery create sustained visibility into future revenue streams.

: The potential implementation of the 5% GDP defense spending target could require nearly $1 trillion in additional U.S. defense spending by 2035 [4]. While full implementation remains uncertain, the direction of allied spending commitments creates a favorable backdrop for companies with international exposure.

The defense and space sector is experiencing a structural transformation driven by three converging forces: elevated geopolitical tensions necessitating increased military spending, a technological revolution emphasizing drones and autonomous systems, and major new programs like the Golden Dome missile defense initiative. The approximately 54% annual outperformance of defense stocks relative to the broader market reflects investor recognition of these fundamental shifts.

As articulated by ARK Invest’s Daniel Maguire and Themes ETFs’ Paul Marino, the investment thesis extends beyond cyclical defense spending to encompass a multi-year secular growth opportunity in defense technology. Companies positioned at the intersection of autonomous systems, space capabilities, and next-generation manufacturing are likely to capture disproportionate value as these programs execute over the coming years.

The convergence of U.S. and NATO spending increases, combined with accelerated adoption of drone technology and space-based systems, creates a sustained demand backdrop for defense technology companies. While valuation considerations and policy risks warrant attention, the structural nature of defense spending increases—codified in multi-year budget authorizations and supported by bipartisan consensus on great power competition—provides a foundation for long-term sector growth.

This analysis incorporates quantitative market data [0], the original YouTube video discussion featuring Themes ETFs and ARK Invest analysts [1], U.S. Department of Defense budget documentation [2], NATO spending commitments [4], defense ETF performance metrics [5], Congressional authorization reports [8][10][15], and industry analysis from defense sector commentators [7][9][11][12][13]. All external sources are cited inline with numbered references and fully documented in the citations field.

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[1] YouTube - “Defense stocks have a long runway amid rising global tensions” (https://www.youtube.com/watch?v=FHU18io_G5k)

[2] U.S. Department of Defense - FY2026 Budget Request Overview (https://comptroller.war.gov/Portals/45/Documents/defbudget/FY2026/FY2026_Budget_Request_Overview_Book.pdf)

[3] Le Monde - “US sets record defense budget but imposes limits on Trump’s military ambitions” (https://www.lemonde.fr/en/international/article/2025/12/19/us-sets-record-defense-budget-but-imposes-limits-on-donald-trump-s-military-ambitions_6748683_4.html)

[4] TD Economics - “The Economic & Fiscal Impacts of U.S. Defense Spending in 2026” (https://economics.td.com/us-defense-spending-impacts)

[5] Yahoo Finance - “Is 2026 the Year to Go Big on Defense ETFs?” (https://finance.yahoo.com/news/2026-big-defense-etfs-160500491.html)

[6] YouTube - “How to play defense stocks in 2026” (https://www.youtube.com/watch?v=y0e0U9pccSA)

[7] Defense Acquisition Substack - “Happy 2026: The Year of Execution” (https://defenseacquisition.substack.com/p/happy-2026-the-year-of-execution)

[8] Congress.gov - “U.S. Army Small Uncrewed Aircraft Systems Programs” (https://www.congress.gov/crs_external_products/IF/PDF/IF12668/IF12668.3.pdf)

[9] U.S. Army - “War Department asks industry to make more than 300K drones quickly, cheaply” (https://www.army.mil/article/289322/war_department_asks_industry_to_make_more_than_300k_drones_quickly_cheaply)

[10] Holland & Knight - “FY 2026 National Defense Authorization Act” (https://www.hklaw.com/en/insights/publications/2025/12/fy-2026-national-defense-authorization-act)

[11] Nasdaq - “Golden Dome Project Begins With a Massive $151 Billion Contract” (https://www.nasdaq.com/articles/golden-dome-project-begins-massive-151-billion-contract)

[12] Defense News - “Space warfare in 2026: A pivotal year for US readiness” (https://www.defensenews.com/space/2026/01/05/space-warfare-in-2026-a-pivotal-year-for-us-readiness/)

[13] Yahoo Finance - “These are the best aerospace and defense stocks to own in 2026” (https://finance.yahoo.com/news/best-aerospace-defense-stocks-own-134450126.html)

[14] NATO - “NATO agrees its 2026 common-funded budgets” (https://www.nato.int/en/news-and-events/articles/news/2025/12/17/nato-agrees-its-2026-common-funded-budgets-strengthening-allied-resolve-in-a-new-era-of-collective-defence)

[15] Congress.gov - “Defense Primer: The Golden Dome for America” (https://www.congress.gov/crs-product/IF13115)