By Al Root

Defense spending is set to rise around the globe, but picking defense-stock winners amid increasingly complex threats, changing global alliances, and the proliferation of artificial-intelligence-trained unmanned systems isn't easy. Northrop Grumman and General Dynamics might be interesting as contrarian plays.

Shares of defense companies have had a fantastic year, with the Global X Defense Tech exchange-traded fund up 63% in 2025. A lot of that is due to Palantir Technologies, its largest holding, yet the average stock in the ETF not named Palantir is up 15%, a sign of just how well the group is doing.

And for good reason. With hotspots in Europe and the Middle East, and others likely to pop in Asia and elsewhere, the U.S. defense budget is set to top $1 trillion in fiscal year 2026. European nations spend roughly half that, but recent commitments won by the Trump administration would see that growth to roughly $1 trillion by 2035, implying 8% to 9% growth for a decade in Europe.

"Defense spending commitments provide a policy floor, while geopolitical uncertainty supplies the premium, together defining the transatlantic defense sector backdrop," writes 22V Research's managing director and head of Washington policy research, Kim Wallace.

That strength is reflected in individual defense stocks. Of the 50-plus stocks 22V looked at, 12 look technically strong -- nine in the U.S. and three in Europe. They include GE Aerospace, RTX, Boeing, General Dynamics, Northrop Grumman, Taser maker Axon Enterprise, L3Harris Technologies, component supplier Curtiss-Wright, nuclear technology supplier BWX Technologies, jet engine makers Safran and Rolls-Royce Holdings, as well as Italian defense aerospace and defense company Leonardo.

Some top-performing defense stocks failed to make the list, such as drone makers Kratos Defense & Security Solutions and AeroVironment, two stocks Barron's recommended earlier this year. That doesn't have anything to do with fundamentals and everything to do with their charts. With shares of the two companies up 90% and 40%, respectively, over the past three months, they might be due for a pullback.

Charts only tell part of the story, however. But Wall Street likes the fundamentals on 10 of 22V's 12 stocks. Only General Dynamics and Northrop Grumman have below-average Buy-rating ratios, with 44% of analysts covering the two companies recommending shares. The average Buy-rating ratio for stocks in the S&P 500 is about 55%. The average Buy-rating ratio for the other 10 stocks is about 70%.

Wall Street could warm up to Northrop and General Dynamics soon. Both recently reported strong second-quarter numbers. And both trade for below-market price/earnings ratios, despite Wall Street forecasting double-digit earnings growth for the next couple of years. General Dynamics, which makes everything from Army tanks to Navy destroyers, can benefit from the Trump administration's push to expand U.S. shipbuilding. Northrop Grumman, probably best known for its stealth bomber, is well-positioned to win business related to the president's Golden Dome missile defense initiative.

Those are two cases where Wall Street's analysts might just have it wrong.

Write to Al Root at allen.root@dowjones.com

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August 22, 2025 03:00 ET (07:00 GMT)

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