The Defense Sector Just Had Its Best Quarter Since the Cold War. Here Is the Full Investment Picture.

Right now, there’s a certain energy in defense investment circles that falls somewhere between subdued confidence and barely restrained excitement. If you take a few minutes to go through the last quarter’s earnings call transcripts, you’ll see that executives who used to hedge every forward-looking statement are now speaking with an almost unfamiliar directness. They are supported by the numbers.

The aerospace and defense industry isn’t just rebounding, with the U.S. defense budget surpassing the trillion-dollar mark and worldwide military spending expected to reach $2.6 trillion by year’s end. It is growing in ways that are uncommon in today’s world.

The background that motivates all of this is not subtle. There is no obvious end in sight to the ongoing conflict between Russia and Ukraine. The Middle East is still a volatile region. Additionally, governments everywhere are being forced to reconsider their military inventories due to the great-power rivalry between the United States and China, which is evident in everything from semiconductor policy to naval buildups in the South China Sea.

Equipment that was acceptable ten years ago now appears to be a liability. Governments do more than just fill in the gaps. They are ordering new weapons systems, missile defense platforms, intelligence infrastructure, and AI-enabled combat tools on several fronts at once as they rebuild from the ground up.

The incorporation of truly new technology into the procurement process distinguishes this cycle from earlier defense upswings. Artificial intelligence is more than just a catchphrase used in press releases from the Pentagon. It is transitioning into real operational systems, such as logistics optimization that lessens the grinding inefficiency of military supply chains, automated battlefield decision support, and predictive maintenance tools that keep fleets in the air longer. Businesses that are positioning themselves at the nexus of next-generation software and conventional defense manufacturing are seeing contract opportunities that did not exist five years ago.

One of the better examples to observe is GE Aerospace. The company, which is based in Evendale, Ohio, has spent decades establishing itself as the foundation of military propulsion; its jet engines power aircraft in air forces all over the world. When the U.S. Air Force awarded it a $5 billion contract to supply F110 engines and related support services under a Foreign Military Sales program, that credibility really paid off. As of right now, analysts predict that GE Aerospace’s revenues will increase by about 11.7% in 2026 while earnings will increase by about 13%. In the last month, the stock has already increased by 7%. The market is treating this as more than a short-term trade, and it’s difficult to ignore.

The story of Pittsburgh-based Howmet Aerospace is somewhat different but just as interesting. The company produces titanium structural parts, aerospace fasteners, and jet engine components—all of which are unglamorous but vital to the operation of modern aircraft. It announced in December 2025 that it would acquire Consolidated Aerospace Manufacturing from Stanley Black & Decker, a move that would greatly expand its portfolio of fastening solutions for aerospace and defense clients.

Howmet will be in a better position to support a sector operating at high production rates if the deal closes as anticipated in the first half of 2026. Estimates of earnings growth for the year are close to 19.7%. Sleepy industrial sectors don’t have numbers like that.

Then there’s Archer Aviation, which is arguably the most optimistic wager in this market. Originally designed for urban air mobility, the San Jose-based company is creating electric vertical takeoff and landing aircraft, or eVTOLs, which are currently attracting significant military interest. Modern defense planners are particularly interested in the concept of hybrid-electric aircraft that can operate in contested environments, take off without a runway, and operate silently. In order to develop specialized defense manufacturing capabilities,

Archer has been obtaining alliances and contracts. 12.6% annual growth is implied by its consensus earnings estimate for 2026. The contract activity indicates real institutional interest rather than speculative noise, though it’s still unclear if the military eVTOL market will grow as quickly as bulls anticipate.

The SPDR S&P Aerospace & Defense ETF, ticker XAR, provides a helpful window into the industry for investors seeking broader exposure as opposed to individual stocks. The fund employs a modified equal-weight strategy, allocating 20% of its portfolio to smaller businesses and about 40% to large-cap and mid-cap names.

Because of this structure, investors can profit from more agile specialists while also gaining significant exposure to well-established companies like Lockheed Martin. In addition to ongoing political negotiations over the final FY2027 U.S. budget, the next big event for XAR holders will be a quarterly index rebalancing, which will either confirm or complicate long-term growth assumptions.

Observing all of this gives the impression that the defense investment narrative is still in its early stages. There is no reduction in the geopolitical pressures. The shift to technology is happening more quickly. Additionally, governments that were hesitant to take action two or three years ago are now acting with such urgency that they are creating actual, long-lasting order books for the manufacturers of this equipment.

Execution, policy, and the erratic course of world events will determine whether that results in consistent shareholder returns over the next five years. However, it seems that everything is set up for a generational defense buildup, the kind that characterized the Cold War era.