Several positives for US defense but FY26 a tough comp

Defense spending growth in the US and Europe is accelerating. The shift is particularly acute in Europe, where NATO allies had been spending between 1.5% to 2% of GDP on defense equipment but agreed in late June to spend 3.5% by 2035 (5% including other national security spend). Stocks of the European defense contractors have performed well this year as the market begins to anticipate this stronger spend and Ron Epstein addresses to what degree this spending will flow to US defense contractors, given Europe has an interest in boosting the domestic defense industry. Certain programs, like the F-35 fighter jet, could take a decade or more to replace should Europe be interested in their own program, while others could be replaced more quickly and this is a reason why US contractors could lose share of Europe spend with time. Ron also addresses the role that drones could play, implications for higher-end defense equipment, whether F27 is poised to be a down year for US defense spending and the new and existing equipment that could be demanded by the US' Golden Dome.

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