Marketing Communication

Defense Industry: What 2025 Might Signal for 2026

20 January 2026

2025 was a historic year for the defense industry, as NATO members pledged to raise spending to 5% of economic output

Key takeaways:

The unfortunate transition to a less peaceful world is reflected in growing defense company order books
2026 looks set to continue the trend of increased military activity, higher defense budgets and bigger order backlogs.

Key risks:

Shifts in government priorities, coalition changes or budget trade-offs can change the pace and direction of defense spending.
Defense equities can be volatile. As a focused theme, performance may be driven by a narrower set of companies, and periods of lower liquidity can amplify price moves.

In just a few hectic January weeks of 2026, an assertive United States has launched several military operations and ratcheted up its rhetoric. It’s early days, but so far 2026 has continued the escalation of military activity seen around the world in 2025, with disputes flaring and states turning to armed forces to achieve foreign policy goals – although any events described for 2026 are forward-looking opinions based on public sources and may not occur.

January saw the United States capture Venezuela’s President Maduro, seize a Russian oil tanker in the Atlantic over alleged sanctions violations and step up its claims to mineral-rich Greenland. Additionally, the US President threatened Iran with unspecified action over its violent crackdown on anti-regime demonstrators.

A review of 2025 shows the number of military conflicts is rising and with it defense spending. Arguably, it was the year when western governments realized that peer-to-peer wars were a possibility once more. In response, the 32 NATO alliance countries in June lifted their target for defense spending to 5% of gross domestic product, or economic output, by 2035. That’s a significant hike from the previous 2%, especially as many countries were not even meeting this level.

Despite uncertainty about whether many of them could afford to honor their pledge, defense company shares rose rapidly in 2025. The VanEck Defense UCITS ETF, a reasonable proxy for global defense stocks, rose by 68.81% during the year.

VanEck Defense UCITS ETF – Calendar year performance & Annualized performance since inception

	2024	2025	Annualized performance since ETF inception (31/03/2023)
DFNS (ETF)	43.54%	68.81%	49.68%
MVDEFTR (Index)	44.06%	69.67%	50.43%

Source: VanEck. Performance as of: 31/12/2024 (2024), 31/12/2025 (2025), 16/01/2026 (since inception). ETF returns not available if there is less than one year’s performance data. All returns are shown in US dollars (USD). MVDEFTR stands for MarketVector Global Defense Total Return Index. It is not possible directly in an index. Past performance does not predict future returns.

2025’s High Levels of Defense Activity

Indicating the level of instability, the Global Peace Index monitored 59 active state-based conflicts in 2025. That number was three higher than in 2024, with wars in most continents.

Notably, in Europe the Russia-Ukraine War proceeded through its third year and has now entered its fourth. Russia increased pressure in the Northeast of the country, while the Ukrainians launched audacious long-range strikes, not least with a major attack on the Crimean Bridge spanning the Kerch Strait. Peace talks backed by the United States made little headway.

In the Middle East a ceasefire was reached in Gaza. However, this was only after a Twelve-Day War in June between Israel and Iran, when Israel bombed Iran’s nuclear facilities. A ceasefire was announced on 23 June.

Turning to Asia, things were little calmer. Border tensions flared between Thailand and Cambodia in March over disputed frontiers. Then a militant attack on Indian-administered Kashmir triggered a four-day conflict in May between India and Pakistan, the most serious clash in decades between the two nuclear powers.

Spending Pledges Turn to Orders

As governments started to rearm, so announcements of higher defense budgets turned into orders. For instance, Italian defense company Leonardo’s order backlog – the confirmed value of pending customer orders that have not yet been fulfilled – experienced an increase of about 10% in the 12 months to September 2025. Meanwhile, the US RTX Corporation saw its order book rise by more than 15% over the 12 months to June 2025.

Source: VanEck research, companies' financial statements and Bloomberg (January 2026).

There were multiple announcements of new procurement. Germany, Poland and the Nordic states announced additional ammunition, missile and air defense procurement. Missile defense shields were a priority. Notably, the United States announced its Golden Dome layered and space-based shield, guarding against hypersonic and ballistic threats. Greece and Japan also prioritized missile defense.

The year also brought a focus on defense manufacturing capacity. February’s Munich Security Conference included sessions on strengthening European defense and broader defence readiness.

Looking ahead to the rest of 2026, 2025’s momentum might continue. Already, US President Trump has called for annual US defense spending to increase by 50% by 2027 to $1.5 trillion.

When taken alongside the historic 2025 NATO spending pledge, this indicates that defense companies’ order books are likely to swell still further. However, defense procurement commitments may be postponed, reduced or cancelled if geopolitical conditions shift, budgets tighten or governments reprioritise, which could reverse order-book growth and put downward pressure on sector valuation.

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This information originates from VanEck (Europe) GmbH, which has been appointed as distributor of VanEck products in Europe by the Management Company VanEck Asset Management B.V., incorporated under Dutch law and registered with the Dutch Authority for the Financial Markets (AFM). VanEck (Europe) GmbH with registered address at Kreuznacher Str. 30, 60486 Frankfurt, Germany, is a financial services provider regulated by the Federal Financial Supervisory Authority in Germany (BaFin).

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