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The defense sector is locked and loaded — but Wall Street still hasn't pulled the trigger. Rising geopolitical tensions, record defense spending, and booming missile demand have done little to lift many of the sector's biggest names.
Defense's pricing gap: Large defense stocks have lagged the broader S&P 500 in 2026 despite booming missile and drone demand and a landmark $10B federal investment commitment. L3Harris Technologies illustrates the disconnect. Its shares fell nearly 9% after earnings despite 28% year-over-year EPS growth and raised full-year guidance. The selloff was driven by a delayed IPO of its missile business, not its underlying performance.
For investors looking to play the broader defense theme, ETFs offer a diversified alternative to picking individual stocks. The State Street SPDR S&P Aerospace & Defense ETF has been one of the standout performers, delivering a 33.4% annualized return over the past three years. Its modified equal-weighted approach gives greater exposure to faster-growing small- and mid-cap companies rather than concentrating heavily in the industry's largest names.
The setup is compelling: B. Riley analyst Mike Crawford calls the current backdrop a generational recapitalization of global defense spending. Analyst price targets across major defense contractors have risen an average of 23% over the past year, while the stocks themselves are up just 13%, leaving one of the widest valuation gaps in years. Whether investors prefer an undervalued name like or broader exposure through or the Invesco Aerospace & Defense ETF, the runway still looks long.