4Q26 Defense Sector Guide - Opportunities Amid Instability

Each quarter, SPADE Indexes releases The SPADE Investor, covering trends, statistics, and analysis across the defense, aerospace, national security, and government sectors. The newest edition for 4Q26 was released in October.Key Takeaways: SPADE Indexes released its quarterly newsletter, The Spade Investor, which examined trends, statistics, and more within the defense, government, national security, and aerospace sectors. The newsletter discussed why the long-term outlook for the defense sector may be compelling, especially given the trajectory of defense budgets and IPOs. Advisors and investors can gain focused access to the defense sector through the Invesco Aerospace & Defense ETF (PPA A-). Below is an excerpt from the latest edition, which covered the key drivers and market trends across defense, national security, and more: As we enter the fourth quarter of 2026… Both Danish Intelligence and Poland’s Prime Minister have stated in recent weeks that there is “a low but growing risk / Russia could attack a NATO country within months.” The US announced that it has deployed weapons in space despite an existing international treaty not to do so. The type and quantity are classified but it will undoubtably open up a new arms race in orbit with China, Russia, and Europe leading the way. Hostilities between the US and Iran continue, punctuated by the occasional cease fire. The Strait of Hormuz remains a critical flash point. Meanwhile, military engagements between the Houthi and Saudi Arabia and Houthi attacks on civilian and energy targets in the region threaten to expand the conflict in the Middle East. The war between Russia and Ukraine has escalated with Russia missiles and drones targeting civilian and energy targets and Ukraine using its expanding missile and long-range drone capabilities to inflict harm on Russian energy and commercial infrastructure. ThoughtsLet’s address the monkey in the room…what happened to the share prices of defense stocks in 3Q26? Despite positive geopolitical catalysts, defense stocks have been under pressure even as tensions involving Iran, the Houthi attacks on Saudi Arabia, and Russia-Ukraine intensify. The recent downward move in share prices appears to reflect a combination of sectorwide technical weakness, macro pressure, and uncertainty about the timing of when defense spending will translate from record backlog to bottom line profits. See More: VettaFi Locks In SPADE Defense Index AcquisitionFrom the Bull PerspectiveLonger-term investors will cite that munitions replenishment remains a fundamental need with significant multi-billiondollar Pentagon contracts recently being awarded for Patriot, THAAD, and other interceptors (see “By the Numbers,” page 5). Additionally, military modernization efforts and elevated defense budgets around the world are long term positives for the sector. The six of the largest aerospace and defense manufacturers/systems integrators reporting more than $1.6 trillion in backlog (BA: $715B, RTX: $289B, GE: $210B, LMT: $194B, GD: $136B, NOC: $105B).The Bear's PerspectiveElection uncertainty, federal deficits in the US and around the world, higher interest rates, and contract delays dues to the continuing resolution process are macro-economic and political drags on the sector. Likewise, inventory shortfalls and industrial base bottlenecks to meet government demand could slow the rebuilding of inventory, so it could take years for backlog to convert to the top and bottom lines at firms. Near-term risk reduction in Aerospace and Defense equities, despite favorable long-term demand fundamentals is currently in control. Still, the underlying defense cycle: replenishment of depleted inventories, missile-defense demand, modernization programs, and larger potential defense budgets all support the sector’s longer-term outlook.What Does History Say about the Bull vs. Bear?Prior SPADE Defense Index research indicates that regardless of why pullbacks in the sector occur, an investor holding a portfolio tracking the SPADE Defense Index and reinvesting any dividends has never seen a decline in principal when holding for 30 months…back to 1980! [using live (2004-present), blind backtest (1997-2004), and estimated data (1980-1997)]Defense Budgets Drive the SectorGlobal military spending has increased annually for the past dozen years with 2026 seeing record highs. This total should surpass $3 trillion in 2027. Defense spending, which was already trending upward, accelerated in response to the Russian invasion of Ukraine in February 2022. The past several years have seen western European nations increase spending on security at levels that are the largest in more than a generation—since the conclusion of World War II. Meanwhile, in the United States, spending on defense topped $1 trillion and the White House has proposed a $1.5 trillion budget for FY2027. There should be no doubt that the world has become increasingly more unstable in the 2020s. Historically defense stocks perform best in times of uncertainty, global instability, and fear—whether perceived or real. It doesn’t matter if it is because of a conflict, the forthcoming threat of a conflict, the aftermath of a terrorist action, or a worry that our current state of readiness or our ability to use a new technology or defend against it is not where it needs to be.Investors Look to Defense Sector OpportunitiesVenture investing: $35.6 billion in defense and defense-adjacent startups across 262 – 1Q26 deals and 150 – 2Q26 deals. 40% higher than 2025 and 2/3 of the 2025 total. Source: PitchBook data cited by Tectonic Defense IPOs: The number of companies going public has surged in 2026 with more than 10% of the 109 priced IPOs in the US (source: US News) having ties to the defense sector. More than a dozen additional firms are rumored to go public in the coming months, depending of course on market conditions, including a number with $50 billion plus valuations. (See page 6.) See More: More Signs This Defense ETF Can Take Off The full newsletter for The SPADE Investor examined the defense, homeland security, and space sectors in far more detail, examining defense spending numbers, the performance of the SPADE Defense Index, and more. To read the newsletter in its entirety, click here.Tackling the Opportunities in Defense Investing With PPAThe SPADE Defense Index is the index of choice for the Invesco Aerospace & Defense ETF (PPA A-). PPA invests in a variety of companies that operate within the defense, aerospace, and homeland security industries, leveraging the unique approach that the SPADE Defense Index brings to the table. This approach to defense exposure has resulted in PPA being one of the largest defense ETFs on the market. As of October 9, 2026, the fund has about $7.2 billion in assets under management. For more news, information, and analysis, visit the Investing in Defense Content Hub. Invesco Distributors, Inc. is an independent company unaffiliated with VettaFi LLC (“VettaFi”). These articles do not form any kind of legal partnership, agency affiliation, or similar relationship between VettaFi and Invesco Distributors, Inc., nor is such a relationship created or implied by the articles herein. VettaFi LLC is the author and owner of these articles. VettaFi LLC (“VettaFi”) is the index provider for PPA, for which it receives an index licensing fee. However, PPA is not issued, sponsored, endorsed, or sold by VettaFi, and VettaFi has no obligation or liability in connection with the issuance, administration, marketing, or trading of PPA.