Defense Stocks at a Crossroads: Earnings Execution vs. Long-Term Strategic Growth

The defense sector is at a pivotal moment. With global geopolitical tensions spiking and defense budgets surging, investors are grappling with a critical question: Are current valuation premiums in the sector justified by near-term earnings momentum, or should they wait for clearer profitability signals? The answer lies in contrasting the divergent trajectories of U.S. and European defense firms, where the former are capitalizing on immediate demand while the latter face structural challenges.

U.S. Defense Firms: A Surge in Earnings and Guidance

U.S. defense contractors have delivered a masterclass in earnings execution. Lockheed Martin, the sector's titan, , , and . CEO emphasized the company's focus on digital technologies and its role in the $175 billion U.S. Golden Dome project, a testament to its strategic alignment with national priorities. Similarly, Northrop Grumman outperformed expectations with a 14% rise in defense systems sales, while RTX (Raytheon Technologies) .

The catalyst? A perfect storm of geopolitical demand. , with U.S. firms dominating the supply chain for advanced systems like air defense and missiles. For example, RTX secured an $8 billion order for munitions in Q3 alone, . These near-term gains are translating into valuation premiums: U.S. , reflecting confidence in their ability to sustain growth.

European Defense Firms: Strong Backlogs, Lingering Challenges

European defense firms, while not as aggressive in earnings execution, are building momentum. BAE Systems, for instance, , including £4 billion for Typhoon aircraft and U.S. defense contracts according to the report. position it for long-term stability. also turned a corner, in the first nine months of 2025, .

However, European firms face headwinds. Their reliance on U.S. suppliers for advanced systems-such as Denmark's recent air defense procurement from European firms-highlights the continent's lag in domestic production capabilities. While European defense budgets are rising, the timing of spending impacts lags behind U.S. firms. For example, the U.S. in 2024 to European allies, but European firms have yet to fully capitalize on this trend. Valuation metrics reflect this gap: , significantly lower than their U.S. counterparts.

Valuation Premiums: Justified or Overdue?

The valuation disparity between U.S. and European defense firms raises a critical question: Are U.S. premiums justified by earnings execution, or are they overhyped? The data suggests a nuanced answer. U.S. firms have demonstrated consistent ability to convert geopolitical demand into near-term profits, supported by robust backlogs and strategic investments in digital production. , while high, is warranted by these fundamentals according to analysis.

European firms, however, offer a different calculus. , but only if investors are willing to wait for the long-term benefits of defense spending to materialize. For example, BAE Systems' focus on and could drive growth in the next 3–5 years. Yet, near-term challenges-such as and delayed contract funding due to U.S. government shutdowns-remain risks.

Strategic Positioning: Where to Play the Crossroads

Investors must weigh execution against strategy. U.S. firms like Lockheed Martin and RTX are ideal for those seeking near-term gains, given their earnings momentum and visibility into 2025. However, European firms like BAE Systems and Airbus Defense offer compelling long-term potential, particularly if European defense industrialization accelerates.

The key is diversification. A portfolio that includes both U.S. earners and European growers can hedge against the sector's inherent volatility. For example, pairing with creates a balanced exposure to both immediate demand and future capacity.

Conclusion

Defense stocks are at a crossroads, but the path forward is clear: U.S. firms are delivering today, while European firms are positioning for tomorrow. Investors must decide whether to bet on the certainty of near-term earnings or the promise of long-term strategic growth. Given the current landscape, a dual approach-leveraging U.S. momentum while hedging with European potential-offers the most prudent path.