President Donald Trump’s plan to seek a sharp increase in the U.S. military budget has sparked a fresh rally in defense stocks globally on Jan. 8, 2026. European defense names are also following suit. A basket of European defense stocks tracked by Goldman Sachs Group Inc. climbed as much as 3.8% on Jan. 8, 2026, extending its weekly advance to roughly 13%, per Bloomberg, as quoted on Yahoo Finance.
Defense stocks across Asia also moved higher. In the United States, major defense contractors Northrop Grumman Corp. NOC and Lockheed Martin Corp. LMT jumped materially on Thursday.
Geopolitics Dominate Early 2026 Narrative
Geopolitical tensions have intensified since last year and 2026 opened on a more severe note, with the United States already conducting a raid in Venezuela and Trump signaling he would not rule out military action to acquire Greenland. On Jan. 7, 2026, Trump called for an additional $500 billion in annual defense spending.
Global Defense Spending at All-Time High
Global military spending climbed to $2.718 trillion in 2024, marking the 10th straight year of growth. Expenditure has jumped 37% since 2015, with 2024’s 9.4% increase representing the largest annual jump since at least 1988.
Amid growing security concerns, global defense spending has been rising since Russia's invasion of Ukraine. Following Russia's invasion, Europe significantly increased its purchases of military equipment from non-EU suppliers. All 32 NATO members increased their defense budgets in 2024, according to SIPRI, with 18 countries meeting or topping the bloc's 2% of GDP target.
Executive Order Targets Capital Returns
Trump also signed an executive order requiring major U.S. defense contractors to suspend stock buybacks, halt dividend payments and cap executive pay at $5 million annually until more capital is directed toward factory expansion and research to accelerate weapon development. This means activities will be on the rise in the defense sector, going forward.
Upbeat Earnings Prospects
Total S&P 500 earnings for the December quarter are expected to rise 62.3% from the same period last year on 12% higher revenues. Aerospace is the best sector among the 16 Zacks sectors, which shows as high as 62.3% expected earnings growth, as quoted on the Earnings Trends issued on Jan. 7, 2026. The second-best performer was technology, which is expected to record 15.4% earnings growth.
Upbeat Sector & Industry Ranks
The Zacks Aerospace-Defense industry is housed within the broader Zacks Aerospace sector. It currently carries a Zacks Industry Rank #95, which places it in the top 39% of more than 250 Zacks industries. Meanwhile, the aerospace sector carries a good Zacks Sector Rank #3.
The Aerospace sector's debt-to-equity ratio of 0.19X indicates that it uses significantly less debt relative to equity compared with the S&P 500 average of 0.57X, reflecting a more conservative and lower-risk financial structure.
Valuation Looks Somewhat Overvalued?
iShares US Aerospace & Defense ETF ITA has gained about 55% over the past one year (as of Jan. 7, 2026) versus about a 17% rally in the SPDR S&P 500 ETF Trust SPY. After a strong run in 2025, the industry now boasts a richer valuation than the S&P 500. The industry now trades at a forward P/E of 22.97X versus the S&P 500’s forward P/E of 18.58X. However, the price-to-growth ratio of the industry is 1.77X versus the S&P 500’s value of 2.04X.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
Lockheed Martin Corporation (LMT): Free Stock Analysis Report Northrop Grumman Corporation (NOC): Free Stock Analysis Report SPDR S&P 500 ETF (SPY): ETF Research Reports iShares U.S. Aerospace & Defense ETF (ITA): ETF Research ReportsThis article originally published on Zacks Investment Research (zacks.com).
Zacks Investment Research
