Lesson for global investors in the first week of 2026: Turbulence persists, defense industry prevails

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The first 10 trading days of 2026 have sent a clear signal to global markets: geopolitical instability is intensifying, prompting the defense sector to further establish itself as the core long-term growth theme of the year.

The catalyst for this round of market repricing comes from multiple geopolitical shocks. The ongoing Russia-Ukraine conflict, U.S. military action to forcibly control the leadership in Venezuela, and Trump reiterating that the U.S. should control Greenland have heightened market concerns about the global security architecture. These events have not only alerted investors but also directly strengthened expectations that governments will increase military spending.

The market has reacted strongly. According to Bloomberg data, Goldman Sachs’ basket of European defense stocks surged 90% in 2025, and then rose another 21% just in January this year. This upward momentum has also spread to Asian markets, with major defense contractor stocks in South Korea and Japan posting double-digit gains. Investors in Europe and Asia have reached a consensus that defense stocks are set for another strong year.

Although some analysts warn of valuation pressures, the mainstream view is that global rearmament must accelerate to cope with an increasingly uncertain world. Morningstar’s analysis points out that, influenced by domestic economic conditions and exposure to U.S. spending, European defense stocks still have an average potential upside of 20% this year, while Trump’s comments about Greenland are expected to speed up Europe’s transition to strategic defense self-sufficiency.

Geopolitical Anxiety Spurs Capital Inflows

The turbulence of the global geopolitical landscape is reshaping investment logic. Aneeka Gupta, Head of Macroeconomic Research at WisdomTree, noted that recent events are a major wake-up call, showing that the U.S. can no longer be overly relied upon, meaning the level and pace of rearmament need to increase.

Meanwhile, Trump’s call to boost Washington’s defense budget by $500 billion has further fueled market enthusiasm. Investors are betting that this budget increase will benefit not only U.S. domestic firms but give rise to spillover effects. Bank of America strategist Michael Hartnett cited a London client’s view in a report to clients, stating that defense has become “the best long-term stock theme everywhere.”

In Europe, Germany's Rheinmetall AG, central to regional military spending plans, has become investors’ top choice. After hitting a record 150% gain in 2025, the stock rose another 22% in January. Vera Diehl, portfolio manager at Union Investment Privatfonds GmbH, said that given their proximity to Greenland, Saab AB and Kongsberg Gruppen ASA will also benefit from the geopolitical tensions.

This wave of rebound has also spurred major participants in Europe’s defense industry to accelerate capital operations. According to sources, billionaire Michal Strnad’s armored vehicle and ammunition manufacturer Czechoslovak Group AS is considering launching an initial public offering (IPO) in Amsterdam as early as next week.

In Asia, defense and security have also quickly become main investment themes at the start of 2026, mainly due to companies’ expectations of growth in export orders. Korean contractors have been especially outstanding, with Hanwha Aerospace Co. shares nearly quadrupling last year and rising almost 30% this month; Hyundai Rotem Co., in the same industry, is up 16%.

Weiheng Chen, global investment strategist at JPMorgan Private Bank, is bullish on large defense suppliers, especially Korean companies, as they expand export operations to capitalize on surging global defense spending.

U.S. Stock Limits and Valuation Concerns

U.S. defense stocks have also risen but at a more moderate pace. The Goldman Sachs basket of U.S. contractors rose 30% in 2025 and 13% in January this year. Although Trump’s push for increased military spending is positive, his plan to restrict stock buybacks and dividends in the sector has dampened market sentiment to some extent.

An analyst team at Mediobanca led by Alessandro Pozzi believes restrictions on capital redistribution may dampen investor interest in U.S. defense stocks, making European peers more attractive. Their assessment shows that BAE Systems Plc and Leonardo SpA have the largest exposure to the U.S. budget among the stocks they cover.

Though industry prospects are strong, risks remain in the market. If peace efforts in Ukraine make a breakthrough, market sentiment could be tempered. Another concern is valuation: the recent rally has pushed European defense stocks to relatively expensive levels versus regional benchmark indices. Fabien Benchetrit, Head of French and Southern European Target Allocation at BNP Paribas, believes that as long as countries persist in increasing autonomy and improving defense infrastructure, the sector’s long-term fundamentals remain solid. However, investors are closely watching when government military spending can translate into real earnings for companies.

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