Defense Tech Stocks: AI Military Spending Surge in 2026

The Generational Shift in Military Spending

Something fundamental changed in global defense spending in 2022, and it was not just the Ukraine war. The war accelerated trends that were already in motion — the rise of AI-enabled warfare, the shift from hardware platforms to software-defined capabilities, and the recognition that the next great-power conflict will be won by algorithms, not just aircraft carriers.

The numbers tell the story. Global defense spending reached $2.44 trillion in 2024, according to SIPRI, the highest level in real terms since the end of the Cold War. The US defense budget for fiscal year 2025 is $886 billion, with the Pentagon requesting $1.8 billion specifically for AI and machine learning — a figure that understates true AI spending because AI capabilities are embedded across hundreds of program line items. NATO European allies increased defense spending by 11% in 2024, with Germany, Poland, and the Nordic countries leading the expansion. Japan increased its defense budget by 26% for fiscal year 2024 and plans to double defense spending to 2% of GDP by 2027.

But the composition of spending is shifting more dramatically than the total. The Pentagon's Replicator Initiative, announced by Deputy Secretary of Defense Kathleen Hicks in August 2023, aims to field “all-domain, attritable autonomous systems at scale of multiple thousands, in multiple domains, within 18–24 months.” The initial budget of $1 billion is expected to grow to $5+ billion as the program demonstrates results. This is the first time the US military has explicitly prioritized mass-produced autonomous systems over expensive legacy platforms.

The lessons from Ukraine are impossible to ignore. An $800 FPV drone carrying a $100 warhead can destroy a $5 million main battle tank. AI-enabled targeting software reduces the sensor-to-shooter cycle from hours to minutes. Commercial satellite imagery provides intelligence that was previously available only to superpowers. Electronic warfare systems determine which side can operate its drones and which cannot. Every one of these capabilities is software-defined, rapidly iteratable, and fundamentally different from the hardware-centric platforms that traditional defense contractors build.

Palantir: The AI Defense Platform at a Nosebleed Valuation

Palantir Technologies (PLTR) is the most important and most divisive stock in the defense tech category. The company's AI-powered data analytics platforms — Gotham for government, Foundry for commercial, and the newer Artificial Intelligence Platform (AIP) — have become critical infrastructure for US military operations, intelligence analysis, and increasingly, enterprise AI deployment.

The business fundamentals are strong and accelerating. Palantir's total revenue grew approximately 30% in 2025 to roughly $3.0–3.2 billion, with US government revenue growing 25%+ and US commercial revenue growing 50%+. The AIP platform, launched in 2023, has been the primary growth catalyst — it enables organizations to deploy LLMs on their own proprietary data with governance and security guardrails, a capability that both government and enterprise customers desperately need. Management has guided for $3.7–3.8 billion in revenue for 2026.

Palantir's government moat is deep. The company holds Top Secret/SCI clearances, operates across classified networks in multiple countries, and has embedded its software in workflows that would take years to replace. The Army's TITAN (Tactical Intelligence Targeting Access Node) program, one of the largest AI defense contracts ever awarded, selected Palantir as the prime contractor in a deal worth up to $823 million. The company is embedded in intelligence community operations that cannot be publicly disclosed but represent significant recurring revenue.

Now the problem: valuation. At approximately $80–120 per share in early 2026 (depending on when you check — the stock has been volatile), Palantir trades at roughly 30–40x forward revenue and 150–200x trailing earnings. This is not a growth stock valuation. It is a faith-based valuation, requiring the belief that Palantir will become a $15–20 billion revenue company within five years with operating margins expanding to 30%+ to justify the current price.

We have conviction in Palantir's competitive position and long-term prospects. We do not have conviction in paying 180x earnings for any company, regardless of quality. The stock could deliver strong returns from here if growth accelerates beyond guidance, but the risk/reward is asymmetric in the wrong direction: limited upside surprise potential versus significant downside if growth merely meets expectations and the multiple compresses toward 60–80x (still premium, but implying 50%+ downside from peak levels).

Anduril: The Most Important Defense Company You Cannot Buy Yet

Anduril Industries, founded in 2017 by Palmer Luckey (who made $700 million selling Oculus VR to Facebook in 2014 at age 21 and then pivoted to building autonomous weapons systems), is the most important private company in the defense tech ecosystem. Last valued at approximately $14 billion following a $1.5 billion funding round in August 2024, Anduril is expected to IPO in 2026 or 2027.

Anduril's product portfolio spans autonomous systems (Altius family of loitering munitions, Ghost drone platform, Dive-LD autonomous underwater vehicle), command and control software (Lattice OS, a real-time operating system for autonomous military operations), and counter-drone systems (deployed along the US southern border and in combat zones). The company's key insight is that modern military systems should be software-first, hardware-second — the opposite of how traditional defense contractors build.

Revenue is reportedly approaching $1 billion in 2025, growing at 50%+ annually, with a backlog exceeding $5 billion. Anduril has won contracts from the US Army, Navy, Air Force, Marine Corps, Special Operations Command, Customs and Border Protection, and intelligence agencies. The company was selected for the Pentagon's Collaborative Combat Aircraft (CCA) program, a landmark initiative to develop AI-piloted drone wingmen for manned fighter jets — a program worth potentially $6+ billion over the next decade.

For public market investors, Anduril's IPO would be the most significant defense tech listing since Palantir went public in September 2020. At a $20–30 billion IPO valuation with $1.5+ billion in 2026 revenue, Anduril would trade at roughly 15–20x forward revenue — a premium to traditional defense but a discount to Palantir. The growth profile (50%+ with massive government backlog) and the margin trajectory (defense software targeting 60%+ gross margins) would make it compelling at the right price. Watch for the S-1 filing.

Traditional Defense Primes: The Contrarian Opportunity

Here is our most contrarian take in this piece: the best risk-adjusted defense investments may not be the sexiest defense tech names. L3Harris Technologies and RTX Corporation offer compelling combinations of value, growth, and AI optionality that the market is underpricing because they lack the narrative appeal of Palantir and Anduril.

L3Harris Technologies (LHX) — The Stealth AI Play

L3Harris is the sixth-largest US defense contractor with approximately $21 billion in annual revenue across three segments: Space & Airborne Systems, Communication Systems, and Integrated Mission Systems. What the market underappreciates is L3Harris's AI and autonomous systems capabilities.

The company's WESCAM sensor systems are the industry standard for intelligence, surveillance, and reconnaissance (ISR) on manned and unmanned platforms. L3Harris provides the tactical communications systems that connect warfighters, drones, and AI decision-support tools in real time. The company's Aerojet Rocketdyne acquisition (completed 2023 for $4.7 billion) added critical propulsion capabilities for hypersonic weapons and space launch.

L3Harris is growing organic revenue at 5–7% with a book-to-bill ratio consistently above 1.0x, indicating an expanding backlog. Operating margins are expanding toward 16% as the Aerojet integration drives synergies. The company targets $3+ per share in free cash flow by 2026, supporting both buybacks and a dividend yield of approximately 2%.

At roughly $230–260 per share and 18x forward earnings, L3Harris trades at a significant discount to its growth trajectory. Compare this to Palantir at 180x earnings. Both companies sell AI-enabled capabilities to the same government customers. L3Harris generates 10x the revenue, earns meaningful profits, and trades at 10% of Palantir's earnings multiple. The market is paying a massive premium for Palantir's software narrative while undervaluing L3Harris's AI capabilities because they are embedded in a traditional defense company.

RTX Corporation (RTX) — The Cash Flow Machine

RTX (formerly Raytheon Technologies) is the world's second-largest defense contractor and third-largest aerospace company, with approximately $80 billion in annual revenue across three segments: Collins Aerospace, Pratt & Whitney (jet engines), and Raytheon (missiles, defense systems). The company is a cash flow machine, generating approximately $7–8 billion in annual free cash flow.

RTX's AI relevance is more subtle but significant. Raytheon's missile defense systems are increasingly AI-enabled, using machine learning for target identification, tracking, and engagement sequencing. The Patriot missile system, which has demonstrated its effectiveness in Ukraine and the Middle East, is evolving toward AI-augmented targeting that can distinguish between drones, missiles, and decoys in real time. Collins Aerospace provides avionics and sensors for both manned and unmanned platforms, with AI integration accelerating across the product line.

RTX's Pratt & Whitney segment provides diversification into commercial aerospace, where the GTF engine program is driving a multi-year revenue and margin expansion as the installed base of A220 and A320neo aircraft grows and aftermarket revenue ramps. The Pratt & Whitney powder metal contamination issue, which required engine inspections and created customer disruptions in 2023–2024, has been largely resolved and depressed the stock below intrinsic value.

At approximately $125–140 per share and 20x forward earnings, RTX offers a 2% dividend yield, 5–7% annual organic revenue growth, and AI optionality across its defense portfolio — without the valuation risk embedded in pure-play defense tech names. For broader context on how AI is reshaping defense and infrastructure spending, our analysis of the AI capex boom covers the cross-sector implications.

The Autonomous Warfare Thesis: Drones, Robots, and AI Wingmen

The most transformative defense investment thesis is not AI analytics (Palantir's business) but AI-controlled autonomous combat systems. Ukraine has proven that the future of warfare is swarms of cheap, autonomous drones overwhelming expensive legacy platforms. The Pentagon is planning accordingly.

The Collaborative Combat Aircraft (CCA) program is the centerpiece. The Air Force plans to develop AI-piloted drone wingmen that fly alongside manned F-35 fighters, conducting reconnaissance, electronic warfare, and strike missions autonomously or semi-autonomously. Each CCA is designed to cost approximately $30 million — one-third the cost of an F-35 — and be “attritable,” meaning the military can afford to lose them in combat. The program has an initial production target of 1,000 aircraft, representing a $30+ billion market. Anduril and Kratos Defense (KTOS) were both selected for the CCA program, alongside traditional prime Boeing.

Kratos Defense & Security Solutions (KTOS) is a small-cap defense company ($1.1 billion revenue, roughly $5 billion market cap) that is one of the purest public plays on autonomous military drones. Kratos makes drone target systems (the BQM-177A subsonic aerial target for the Navy) and is developing tactical combat drones including the XQ-58A Valkyrie and the Erinys high-speed autonomous system. At approximately 55x forward earnings, Kratos is expensive relative to defense primes but cheap relative to the potential market opportunity if autonomous combat systems scale as the Pentagon envisions.

The broader opportunity extends beyond aviation. Ground robots, autonomous surface vessels, and underwater drones are all in development and early deployment. Textron Systems (subsidiary of Textron, TXT), General Dynamics (GD), and L3Harris all have autonomous ground and maritime programs. The total addressable market for autonomous military systems is estimated at $50–75 billion by 2030.

The European Rearmament Opportunity

European defense spending is undergoing its most significant expansion since the Cold War. NATO European members increased defense spending by 11% in 2024 and are committing to 2.5–3% of GDP targets that, if fully implemented, would represent an additional $100–200 billion in annual defense spending versus pre-2022 levels.

Germany's €100 billion special defense fund (Sondervermögen), announced in February 2022, is being deployed across munitions replenishment, fighter aircraft procurement (F-35 purchases from Lockheed Martin), and — critically for the defense tech thesis — command and control digitization. Poland is targeting 4.2% of GDP on defense by 2025, the highest ratio in NATO. Finland and Sweden, newly joined NATO members, are expanding military capabilities across the board.

For US-listed defense stocks, European rearmament creates export opportunities. RTX's Patriot missile system is in high demand across NATO countries. L3Harris's communication systems are NATO-standard. Lockheed Martin's F-35 is the fighter of choice for European allies upgrading from legacy F-16s and Eurofighters. The international revenue growth for these companies — growing at 10–15% versus 5–7% domestic — is the underappreciated catalyst in traditional defense primes.

European defense stocks offer a complementary exposure. Rheinmetall (Germany), BAE Systems (UK), Thales (France), and Saab (Sweden) are all beneficiaries of the European rearmament cycle and trade at more reasonable valuations than US defense tech names. For investors analyzing global spending trends, our article on sovereign AI and geopolitical investing provides the macro framework.

Portfolio Construction: Balancing Growth and Value in Defense Tech

We recommend a tiered approach to defense tech portfolio construction that manages valuation risk while capturing the structural growth theme:

Tier 1 — Core (60%): L3Harris (LHX) and RTX Corporation (RTX) at 15–20x earnings. These are profitable, dividend-paying defense companies with growing AI capabilities, expanding international revenues, and reasonable valuations that provide downside protection. They are not exciting. That is the point — defense spending is a multi-decade secular trend, and you do not need to pay 150x earnings to benefit from it.

Tier 2 — Growth (30%): Palantir (PLTR) as a smaller position, sized to reflect the valuation risk. At current multiples, we recommend no more than 2–3% of portfolio value in Palantir, with a plan to add on pullbacks toward 60–80x earnings. If Anduril IPOs at a reasonable valuation (15–20x forward revenue), it could become a Tier 2 holding.

Tier 3 — Optionality (10%): Kratos Defense (KTOS) for pure-play autonomous drone exposure. Small position, venture-style sizing, with the understanding that this is a binary bet on whether the Pentagon's autonomous systems vision materializes at scale.

Total defense tech allocation for a diversified equity portfolio: 4–8%. This is a permanent allocation, not a tactical trade. Defense spending cycles in decades, not quarters, and the AI integration thesis will play out over the 2025–2035 period. For insights on how to track the AI capabilities being integrated into defense platforms, see our analysis of AI supply chain analysis for investment signals.

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