Half-year summary
In the first half of 2026, global defense demand depends increasingly on available industrial capacity rather than on political will alone. Markets reflected this dynamic in three distinct ways: consolidation in Europe, linear growth in the United States, marked volatility in Asia.
According to SIPRI, global military spending reached $2,887 billion in 2025 (+2.9% in real terms), the eleventh consecutive year of growth and the highest level relative to global GDP since 2009, driven by Europe at +14% and Asia-Oceania at +8.1%, while the United States recorded a 7.5% decline (in the absence of new Ukraine aid packages, though still the world's top spender at $954 billion). The five largest spenders — the United States, China, Russia, Germany, India — account for 58% of world spending.
Three markets, diverging trajectories
The three curves show the divergence between regions: the US rises with a single correction (the early-April tariff shock); Europe oscillates within a narrow range with a clear low at the cancellation of the F126 program; Asia (proxy: the Korean KDEF index) shows the most extreme cycle, with a peak above 30% right after the outbreak of the Iran war and a steady decline in the following months.
United States — linear growth, underpinned by fundamentals
The benchmark ETF (iShares U.S. Aerospace & Defense, ITA) gained about 15.8% from the start of the year to early July, recovering from the early-April dip tied to the US tariff shock. It is the trajectory most directly traceable to corporate fundamentals in the half-year: Lockheed Martin closed Q2 with over $20 billion in sales (+11% year-on-year), a record backlog of $230 billion (+38% year-on-year, also supported by a $35 billion multi-year contract for THAAD interceptors) and a 10.6% stock rise on earnings day (23 July). CEO Jim Taiclet summed it up in the official release, citing over $20 billion in sales and $65 billion in new orders, taking the backlog to a record $230 billion. RTX recorded a similar trajectory: revenue at $24.7 billion (+16% organic), backlog at $289 billion (+22%), stock +7.7% on the day. CFO Neil Mitchill pointed to a detail relevant to Vespri's European thesis: about half of the half-year's new international orders — $7 of $10 billion — came from European customers, indicating that European rearmament also runs through American suppliers, not only continental ones.
Europe — from rally to demands for concrete results
After a 2025 in which the STOXX Europe Aerospace & Defence index had more than doubled in value, 2026 was a year of consolidation: by the end of May the index was slightly negative year-to-date (−1.2%) against a broader STOXX 600 at +4.8%. Morningstar analyst Loredana Muharremi described it to CNBC, noting that investors have become very selective and now demand evidence of earnings and cash flow, not just forecasts. The most representative case is Rheinmetall: from its September 2025 highs, the stock lost nearly half its value after the cancellation of the German F126 frigate program (24 June, −19% in a single session), before recovering 17% in the weeks ahead of the NATO summit in Ankara. Not all European stocks followed the same path: Dassault Aviation gained as much as 10% intraday on 23 July on H1 revenue growth of 46% and Rafale export momentum, while Saab closed a Q2 with a record backlog (SEK 317.7 billion, up from SEK 197.6 billion a year earlier) thanks to a SEK 47 billion Polish submarine contract and an SEK 8.7 billion agreement with Germany's TKMS for four frigates.
Asia — the region with the greatest variability
This is the region that recorded the greatest volatility of the half-year, and the widest dispersion between individual markets. The Nifty India Defence index gained around 20% year-to-date (against a Nifty50 down 7% over the same period), supported by captive domestic demand from the "Make in India" program and exports up 62% (driven by BrahMos missile contracts, including one with Vietnam worth roughly $629 million). South Korea recorded the sharpest cycle of all: the KDEF sector index hit a year-to-date peak of +33.8% on 28 February — the same day the Iran war broke out — before falling to −12.8% year-to-date by 22 July, a drop of roughly 40% from the highs in under five months. Hanwha Aerospace rose nearly 25% in a single session on 3 March, while LIG Nex1 hit the daily limit of +30% the same day, boosted by the combat debut of its Cheongung-II air defense system in the UAE's defense against Iranian missiles (a stated intercept rate of around 96%). Japan recorded more linear growth: Mitsubishi Heavy Industries and Kawasaki Heavy Industries gained as much as 59% and, in single sessions, up to 17% respectively, supported by the liberalization of Japanese arms exports and the GCAP next-generation fighter program (with the UK and Italy).
The comparative summary
| Dimension | US | Europe | Asia |
|---|---|---|---|
| 2025 defense spending growth (SIPRI) | −7.5% ($954bn) | +14% ($864bn) | +8.1% ($681bn, Asia-Oceania) |
| H1 2026 stock performance | iShares sector ETF (ITA) ~+15.8% YTD | STOXX Europe Aerospace & Defence ~−1.2% (as of end May) | Divergent: India +20%, Korea with extreme cycle (+34%→−13%), Japan (MHI) +59% over 12 months |
| Main geopolitical driver | Pentagon restock, Iran/Ukraine wars | NATO rearmament, Ukraine | Iran war, China-Taiwan, South China Sea, Korea/India exports |
| Reference backlog | Lockheed $230bn, RTX $289bn | Saab SEK 317.7bn (single stock, not a European aggregate) | ST Engineering S$34.5bn, Korean Big 4 ~$69-72bn |
| Outlook | Record backlog, raised guidance | Consolidation, selectivity | Structural but with execution risk/stretched valuations |
Backlogs (orders not yet invoiced) are the most stable indicator of structural demand, since unlike share prices they don't swing with the day's news. RTX and Lockheed Martin, with a combined total of over $500 billion, remain the sector's benchmark; the Korean "Big 4" (Hanwha Aerospace, Hyundai Rotem, KAI, LIG Nex1) show how quickly Asia is building a comparable mass.
Company-by-company move detail
| Date | Company | Move | Event |
|---|---|---|---|
| 3 Mar 2026 | Hanwha Aerospace | ~+20/25% | Reaction to the Iran war (28 Feb) |
| 3 Mar 2026 | LIG Nex1 | +30% (daily limit) | Combat debut of the Cheongung-II system (UAE) |
| 24 Jun 2026 | Rheinmetall | −19% | Cancellation of the F126 frigates |
| 16 Jul 2026 | LIG Nex1 | +21.5% | Optimism over the end of the Iran conflict (later disproven) |
| 23 Jul 2026 | Dassault Aviation | up to +10% intraday | H1 revenue +46%, Rafale export momentum |
| 23 Jul 2026 | Lockheed Martin | +10.6% | Q2 results, record $230bn backlog |
| 23 Jul 2026 | RTX | +7.7% | Q2 results, record $289bn backlog |
Voices from the sector
Direct quotes from CEOs and institutions, gathered from press releases and public statements, offer a direct read on the half-year's trajectory.
"Over $20 billion in sales — a year-over-year increase of 11% — free cash flow of $2.9 billion, and $65 billion of new orders, which takes our backlog to a record $230 billion."
Jim Taiclet, CEO Lockheed Martin — official Q2 2026 release (23 July)
"NATO delivers."
Mark Rutte, NATO Secretary General — closing remarks of the Ankara summit (8 July)
About half of the half-year's new international orders — $7 of $10 billion — came from European customers, a sign that European rearmament also runs through American suppliers, not only continental ones.
Neil Mitchill, CFO RTX — Q2 2026 earnings call
"Investors are becoming very picky and very selective. What investors want to see now are earnings and cash flows."
Loredana Muharremi, Morningstar analyst — to CNBC (30 May)
Around 350,000 applications received globally over the past year for the group's hiring plans.
Armin Papperger, CEO Rheinmetall — public statement
The geopolitics behind the numbers: the essential timeline
28 February 2026 — The US and Israel attack Iran, launching a conflict that will drag on for months. It is the half-year's first geopolitical shock: it effectively halts traffic in the Strait of Hormuz, swings Brent between $70 and $120 a barrel, and drives a sharp rise in trading volumes for Asian defense stocks (Tokyo and Seoul react on 2-3 March). It is also the event that puts Korean- and Israeli-made air defense systems to their first real test, accelerating export orders.
Spring 2026 — In Ukraine, the long-range drone offensive strikes Russian refineries, with the attack on Omsk (2,500 km from the front) on the eve of the July NATO summit, confirming that drone warfare has become as central as artillery warfare, and fueling European demand for anti-drone systems.
23 June 2026 — The Chinese carrier Fujian crosses the Taiwan Strait, the day after a five-day Taiwanese military exercise begins. China-Taiwan tensions remain the structural geopolitical risk least reflected in market prices during the half-year, but they weigh on the valuations of Asian and Japanese suppliers.
24 June 2026 — Germany cancels the F126 frigate program, Rheinmetall loses 19% in a single session: even in the sector most favored by the half-year's context, individual programs can still fall through.
7-8 July 2026 — The NATO summit in Ankara marks a turning point for Europe: over $50 billion in new contracts, a $40 billion anti-drone program ("Drone Edge"), the start of direct NATO negotiations for Saab GlobalEye surveillance aircraft. Secretary General Mark Rutte sums it up with the phrase "NATO delivers." The summit also exposes some tensions within the Alliance: no date set for the next summit, Spain isolated and publicly criticized by Trump, and Greenland tensions once again weighing on the transatlantic relationship.
16 July 2026 — In Korea, a fresh rise in defense stocks (LIG Nex1 +21.5%) accompanies early signs of a possible end to the Iranian conflict, before fighting resumes at the end of July — confirming how tied the Asian geopolitical premium remains to the day's headlines, more so than in Europe or the United States.
23 July 2026 — In the United States, Lockheed Martin and RTX close the half-year with results describing a more linear trajectory than their European and Asian counterparts: solid growth and rising backlogs (over $500 billion combined). This confirms that the Pentagon's "restock" cycle, less dependent on political decisions tied to a single summit or the outcome of a single regional conflict, proceeds more steadily than its European and Asian counterparts.
The employment picture: over a million jobs in Europe
Beyond stock-market moves, the most relevant figure for this analysis remains employment. The European aerospace-defense sector has reached 1.1 million direct employees (+6.9% year-on-year according to the latest ASD report), confirmed by individual groups' hiring plans: Rheinmetall is targeting 40,000 employees (+30% from pre-boom levels) and CEO Papperger has publicly cited around 350,000 applications received globally over the past year; Thales announced over 9,000 hires in 2026, after receiving 1.4 million applications in 2025 alone; Leonardo is targeting 75,500 employees by 2030 (up from 62,700 in 2025). This is concrete confirmation of what markets express more intermittently: demand for engineers, technicians and skilled defense workers reflects a structural shift in the labor market, not simply a stock-market cycle.
The Asian parallel is equally relevant, even though granular employment data are more limited. The record backlogs of the Korean "Big 4" (Hanwha Aerospace, Hyundai Rotem, KAI, LIG Nex1, roughly $69-72 billion combined) and of ST Engineering in Singapore (S$34.5 billion) point to a dynamic similar to Europe's: demand for skilled labor is growing faster than the capacity to hire and train it, with resulting execution delays, visible for instance in Hindustan Aeronautics' compressed margins in the first quarter of the fiscal year.
Change factors to monitor
Three thresholds to watch for anyone following the sector from a labor-market perspective:
1. If the Korean KDEF recovers stably above its March highs, it confirms that Korean exports and the related hiring cycle are sustainable beyond the geopolitical shock.
2. If Lockheed's and RTX's backlogs stop growing (book-to-bill below 1x), it's the first sign of a possible slowdown in US hiring within 12-18 months.
3. If the Iran war reignites persistently or China-Taiwan tensions escalate beyond exercises, Asian regional demand accelerates further — but so does the unpredictability that has already swung Korean stocks by forty percentage points in five months.
The same sector, read through Vespri's other reports
The employment figure cited above (+57,837 jobs in 2022-2026, the only sector to fully reverse sign) comes from the Employment report. The margin expansion (+6.6pp EBITDA, the widest among the seven sectors) is examined in the Finance report. The skills profile in demand — dominated by systems engineering and cybersecurity — is in the Skills report.
Notes
Reading note: in the comparative summary table, the "H1 2026 stock performance" row is the one with explicit price changes; the other rows (spending, geopolitical driver, backlog) provide the context that explains why those changes occurred — consistent with this report's event→price framing.