The Power of Compounding in Defense and Tech Stocks: A 5-Year Perspective on RTX and the Lessons for 2026

The interplay between sector resilience and compounding returns has long been a cornerstone of strategic investing. Over the past five years, the aerospace and defense sector, epitomized by Raytheon Technologies (RTX), and the technology sector, represented by Microsoft (MSFT), have offered contrasting yet instructive narratives. As we approach 2026, understanding these dynamics becomes critical for investors seeking to balance growth and stability in an increasingly volatile global economy.

RTX: Defense Sector Resilience and Compounding Power

Raytheon Technologies has demonstrated remarkable resilience in the aerospace and defense sector, with a 137% cumulative return from 2020 to 2024, including reinvested dividends according to Total Real Returns. This outperformance is underpinned by a dual business model: a defense segment bolstered by geopolitical tensions and a commercial aerospace division benefiting from post-pandemic recovery. For instance, RTX's defense segment reported a Q3 2025 book-to-bill ratio of 2.27, signaling robust demand.

Meanwhile, its commercial operations generated $4.0 billion in free cash flow during the same period, highlighting the sector's ability to generate stable cash flows even amid macroeconomic headwinds as reported by The Globe and Mail.

The compounding effect of reinvested dividends has further amplified RTX's long-term returns. With an annualized return of 23.53% over five years according to Total Real Returns, investors who reinvested dividends saw their holdings grow significantly, even during downturns like the 2023 −14.44% decline. This resilience stems from the sector's reliance on sovereign-backed contracts, which provide a buffer against market volatility as noted by MFS Investment Management.

MSFT: Tech Sector Volatility and Growth

Microsoft, a bellwether of the tech sector, delivered a 126.60% total return over the same period, with $1,000 growing to $2,266.03 according to FinanceCharts. However, its performance was marked by sharp volatility: a −28.02% drop in 2022 followed by a 58.19% rebound in 2023. This pattern reflects the tech sector's exposure to macroeconomic cycles and regulatory pressures. While Microsoft's cloud and AI initiatives drove growth, challenges such as supply chain disruptions and regulatory scrutiny on AI applications tempered its trajectory as highlighted by Deloitte.

The tech sector's compounding returns, though impressive, are less predictable than those of defense stocks. For example, Microsoft's 2024 return of +12.93% according to FinanceCharts pales in comparison to RTX's +40.76% in the same year, underscoring the divergent impacts of sector-specific factors.

Sector Resilience: Defense vs. Tech

The defense sector's resilience is rooted in its alignment with national security priorities. According to a report by MFS Investment Management, the MSCI Europe Aerospace & Defense Index outperformed the broader MSCI Europe Index in 11 of the past 14 years, a trend attributed to long-term government contracts and sovereign-backed cash flows. In 2024, global defense budgets grew by 9%, driven by investments in cyber, space, and next-gen technologies. This structural demand ensures a steady revenue stream, even during economic downturns.

In contrast, the tech sector's growth is more cyclical. While innovations like cloud computing and AI have driven explosive growth, they also face regulatory and operational risks. Deloitte notes that supply chain challenges and labor constraints persist in both aerospace and defense sectors, but the latter's reliance on government contracts provides a critical buffer as noted by Deloitte.

Lessons for 2026

As we look ahead, investors must weigh the trade-offs between high-growth tech stocks and resilient defense equities. RTX's 25-year $251 billion backlog and strategic focus on defense modernization position it as a long-term compounding engine according to The Globe and Mail. For 2026, a balanced approach that leverages the compounding power of defense stocks while selectively investing in tech's high-potential areas may offer the optimal strategy. As PwC highlights, the integration of AI and agentic AI in defense logistics and maintenance is reshaping the sector, creating new avenues for growth as reported by Deloitte.

Conclusion

The past five years have underscored the importance of sector-specific resilience in compounding returns. While tech stocks like Microsoft offer explosive growth, defense stocks like RTX provide stability and predictable cash flows. For investors navigating 2026's uncertainties, the key lies in aligning their portfolios with both the compounding potential of defense equities and the innovation-driven opportunities in technology.