Innovation Insights: A CTO’s Perspective

Global Defense Equity Strategy:

Navigating the Defense Supercycle

US & European Defense Industry Landscape | May 2026

Executive Summary

Four structural forces are converging to create this opportunity. First, the Ukraine conflict has exposed a critical gap between Western production capacity and the demands of sustained high-intensity peer warfare that has resulted in the creation of emergency procurement requirements that will take years to fulfill. Second, NATO burden-sharing mandates have catalyzed the largest synchronized European defense spending increase since 1949, with 2% GDP floor targets now being superseded as multiple members commit to 3–4% annually. Third, the rise of AI and its incorporation into next-generation intelligence, autonomous weapon systems, and precision munitions is reshaping capability requirements. Fourth, great power competition, principally the US-China rivalry across the Indo-Pacific and Russia's sustained aggression in Europe, has made defense spending politically durable across administrations, party lines, and election cycles.

The defense spending cycle can be understood through three sequential, overlapping phases:

Six structurally significant areas define the current cycle: (1) air defense interceptor production, (2) long-range precision strike, (3) US domestic supply chain reshoring across rare earths, energetics, and solid rocket motors, (4) naval platform recapitalization, (5) European air defense industrial creation, and (6) autonomous/unmanned systems as Phase 3 development. In this report, both US- listed and European-listed companies are discussed, with distinct industry frameworks appropriate to each market’s structure, contract norms, and political environment.

I. How Did We Get Here? Consolidation, Atrophy & Supercycle

The “Last Supper” - Americas Industrial Consolidation (1993–2002)

The Soviet Union's collapse in 1991 triggered one of the most consequential industrial restructurings in US modern economic history. With the Cold War over and the US defense budget set to contract sharply, the then-Deputy Secretary of Defense William Perry convened a meeting with the major defense contractor CEOs in 1993 at what became known in the industry as the "Last Supper." Will Perry’s message to those in attendance was unambiguous: “the Pentagon would no longer support a fragmented ecosystem of over 50 prime defense contractors” and explicitly told those in attendance that only those willing to consolidate would survive.

The wave of mergers that followed compressed a generation of industrial capacity into five dominant primes within a decade. Lockheed merged with Martin Marietta in 1995, then absorbed Loral's defense electronics businesses to form Lockheed Martin. Northrop acquired Grumman in 1994. Boeing absorbed McDonnell Douglas in 1997. Raytheon absorbed Hughes Aircraft, E-Systems, and Texas Instruments' defense divisions. General Dynamics consolidated Bath Iron Works, Gulfstream, and NASSCO. The result is the familiar five-prime universe we know today; Lockheed Martin, RTX (Raytheon), Northrop Grumman, Boeing Defense, and General Dynamics. These five companies control the vast majority of prime US defense contract value today. All this while many nondefense industries were offshoring US manufacturing to China and other lower-cost countries.

The European Parallel: National Champions & Consortia (1995–2005)

Europe followed a similar, if more politically complex, consolidation path. BAE Systems emerged from the 1999 merger of British Aerospace and GEC-Marconi. EADS (now Airbus Defence & Space) was created in 2000 from the Franco-German-Spanish combination of Aerospatiale, DASA, and CASA. MBDA was established as a pan-European missile consortium jointly owned by Airbus, BAE Systems, and Leonardo, which was the only structure capable of bridging French, British, and Italian missile programs. Thales emerged as France's dominant defense electronics champion. These consolidations were as much instruments of national industrial policy as financial transactions, with governments retaining golden shares and strategic ownership stakes.

The Hollow Force Years: Atrophy by Policy (2001–2021)

The post-9/11 era masked an underlying degradation of Western defense industrial capacity. Supplemental war appropriations for Afghanistan and Iraq sustained revenues but funded operational consumption rather than platform modernization or industrial investment. The Budget Control Act of 2011 and subsequent sequestration imposed sharp cuts to baseline procurement. Landmark programs, including the US Army's Future Combat Systems, the F-22 (capped at 187 aircraft instead of 750), and the Navy's Littoral Combat Ship, were either truncated or cancelled. In Europe, the 2008 financial crisis and decade of austerity drove nearly every NATO ally below the 2% GDP defense commitment. Munitions stockpiles were drawn down. Production lines for artillery shells, cruise missiles, and interceptors were sized for peacetime replacement rates and not for peer conflicts.

By 2021, MBDA's Storm Shadow production line was sized for approximately 100 missiles per year, a number believed sufficient for peacetime attrition, but wholly inadequate for a high- intensity conflict consuming precision munitions at thousands-per-month rates. NATO's artillery shell stockpile across all members was estimated at weeks of supply in sustained combat. The structural vulnerability of the Western defense industrial base was not unknown to the DoD or NATO member countries, in fact, it was a deliberate policy consequence of 30 years of post- Cold War demobilization, often referred to in the media as the “Peace Dividend”.

The New Breed of Weapons Supplier (2014–Present)

Russia's 2014 annexation of Crimea served as a first warning. But it was the full-scale invasion of Ukraine in February 2022 that catalyzed the systemic reorientation underway today. Simultaneously, a new category of defense supplier has emerged to challenge traditional primes: technology-native companies that prioritize software-defined capability, rapid iteration, and fixed-price development. Palantir Technologies (CIA-backed from 2003) has become the dominant provider of AI enabled battlefield data fusion for intelligence. Anduril Industries, founded in 2017 by Palmer Luckey, has rapidly won contracts for autonomous systems, counter-drone platforms, and Collaborative Combat Aircraft demonstrators that would historically have gone exclusively to established primes. Shield AI and Joby Aviation (defense variant) represent additional entrants. These companies are at the leading edge of Phase 3 but are increasingly relevant in current procurement as the DoD's preference for non- traditional contractors grows under the Defense Innovation Unit and DIUx model.

II. Where Will the Funding Be Directed Going Forward?

Key Demand Categories: Platforms, Munitions & Suppliers

In the following section, we have summarized what we believe are the five most strategically critical and commercially significant weapons system categories driving near-to-medium term procurement spending. Full program by program supplier and financial detail is provided in Appendices A–D of this Newsletter.

1. Air Defense: The Highest-Urgency Category

Air defense is the single largest current vulnerability and thus the most acute procurement priority area across both US and allied inventories. The Ukraine conflict demonstrated that a contested air environment requires layered, interoperable defenses that are consuming interceptors at rates that were never anticipated in any Western procurement cycle. The demand for interceptors is not theoretical: it is a funded, contracted emergency across sixteen-plus NATO allies. The FY2026 bill added an additional $500 million for PAC-3 and granted multiyear authority across all major interceptor families. At RTX's Q1 2026 earnings call, management disclosed five framework agreements with the Department of Defense covering Tomahawk, AMRAAM, and the Standard Missile family, with the company's backlog reaching a record $271 billion, up 25% year-over-year.

Patriot / PAC-3 MSE (RTX / Lockheed Martin): The cornerstone long-range system for 18 nations. The PAC-3 MSE interceptor, manufactured by Lockheed Martin in Camden, AR, is the single highest- demand munition in the current restocking cycle. RTX is the system integrator; both companies are central to the program’s industrial base.

NASAMS (Kongsberg / RTX): The National Advanced Surface-to-Air Missile System has emerged as the primary medium-range solution for Ukraine and multiple NATO allies and is the preferred medium-range air defense solution. Kongsberg Defense & Aerospace (Oslo KOG) Q4 2025 revenues grew 44% year-over-year, with the defense backlog reaching a record NOK 125.4 billion, up 25% in Q4 alone. The missiles and air defense portion alone amounts to approximately NOK 98 billion. Kongsberg won a ~€500M NASAMS deal for Denmark in Q4 2025 and announced construction of missile factories in both the US and Australia for 2025 start, establishing it as a leading European-US co-production participant in the air defense segment.

IRIS-T SLM (Diehl Defence / MBDA ecosystem): Germany's IRIS-T SLM has demonstrated near- 100% intercept rates against cruise missiles and drones in Ukrainian service. Diehl Defence is the prime; accessible indirectly through Airbus, BAE Systems, and Leonardo as MBDA shareholders.

Arrow 3 (IAI / Boeing): Upper-tier exo-atmospheric ballistic missile defense. Germany's EUR 4B purchase, the first Arrow 3 foreign export establishes a template for Baltic and Polish follow-on orders. Israel Aerospace Industries leads; Boeing is the US industrial partner.

Lockheed Martin (LMT): Reported a record $194 billion backlog at FY2025 year-end which represents approximately 2.5x annual sales, with a full-year book-to-bill of 1.2x. Missiles & Fire Control

posted strong double-digit sales gains. FY2025 sales were $73.6 billion (+6%); 2026 guidance is $77.5–80 billion. JASSM-ER orders from Poland, Australia, Norway, and Finland are multi-year contracted. PrSM (Precision Strike Missile) is entering production as ATACMS' replacement, with Army missile procurement potentially rising from $7 billion to $37 billion in FY2027.

Iron Dome / David's Sling (Rafael / RTX): US co-production of Tamir interceptors (RTX, Camden, AR) is ramping as allied demand grows for short-range rocket defense. Demonstrated 90%+ intercept rates under real-world saturation conditions.

2. Long-Range Precision Strike

JASSM-ER / JASSM (Lockheed Martin): The Joint Air to Surface Standoff Missile family is the premier allied cruise missile export. Poland, Australia, Norway, Finland are major customers. Lockheed is the sole-source provider with a backlog exceeding $5B with production ramping toward 550+ per year.

Tomahawk Block V (RTX): The Navy's primary land-attack cruise missile in high demand across US, UK, Australia, and Japan. Production expansion is underway; multi-year contract awards provide 3–4 year revenue visibility.

PrSM (Lockheed Martin): The Precision Strike Missile replaces ATACMS with 500km+ range and is entering production. Sole-sourced to Lockheed; represents a multi-decade Army precision strike franchise.

Storm Shadow / SCALP (MBDA): The Franco-British standoff cruise missile has been provided to Ukraine and demonstrated high operational effectiveness. Production expansion is a declared UK and French government priority as well as a direct Phase 2 investment theme within the MBDA ecosystem.

3. Hypersonic Offense & Defeat Systems (The New Threat)

Hypersonic weapons capable of traveling at Mach 5+ on maneuvering trajectories represent the most contested new armament category. The US is in active catch-up after a decade of program delays; offense and defense programs are both accelerating with significant prime and sub-contractor content and are well behind China and Russia in this area.

The FY2026 defense budget includes $3.9 billion for hypersonic weapons; the FY2027 request proposes a major acceleration. Northrop Grumman has been selected as prime for the Glide Phase Interceptor and closed FY2025 with a record $95.7 billion backlog and free cash flow up 26% to $3.3 billion, driven by B-21 Raider production, Sentinel ICBM modernization, and hypersonic defense programs. RTX's HACM program (with Northrop Grumman scramjet propulsion) is in engineering and manufacturing development. The Golden Dome is the Trump administration's space-based missile defense initiative and has received $25 billion in the FY2026 budget with the FY2027 request fully funding it.

4. Naval Platforms

Virginia-class SSN (GD Electric Boat / HII): The US Navy's highest-priority shipbuilding program, with production rates targeted to nearly double from 1.2 to 2.33 per year. The AUKUS agreement adds Australia as a future customer, extending revenue visibility into the 2040s. GD and HII share production of these subs in a duopoly, making them the primary industrial participants in the program.

The Virginia-class submarine program is the US Navy's highest-priority shipbuilding investment. General Dynamics' Marine Systems segment (home to Electric Boat) generated $16.7 billion in 2025 revenue, up 16.6% for the third consecutive year of double-digit growth, driven by Virginia-class and Columbia-class programs. GD's Marine Systems total backlog stands at $52.3 billion. HII reported $12.5 billion in revenue and a $53.1 billion backlog for FY2025. The program target is increasing production from approximately 1.2 boats per year to 2.33 per year, with AUKUS requirements for 3–5 boats to Australia adding further demand extending into the 2040s.

DDG-51 Flight III (HII / GD Bath Iron Works): The Arleigh Burke destroyer, integrating Aegis BMD capability, is currently being built at surge rates. Flight III represents the most capable surface combatant in any allied inventory.

5. Autonomous & Unmanned Systems (Phase 3 Positioning)

Collaborative Combat Aircraft (Anduril / Kratos / Boeing): AI-enabled autonomous aircraft designed to fly alongside crewed platforms, dramatically expanding sortie generation capacity at a fraction of the cost of a crewed aircraft. Anduril's Fury CCA and Kratos' XQ-58A Valkyrie are the leading demonstrators.

Counter-UAS Systems (RTX / Anduril / Northrop): The proliferation of cheap drones from commercial quadcopters to Shahed-136 loitering munitions, has created the defining tactical problem of modern warfare. RTX's Coyote interceptor, Anduril's Lattice AI platform, and Northrop's Integrated Air and Missile Defense solutions address this asymmetric challenge. The cost problem (expensive interceptors killing cheap drones) is the core driver of Phase 3 investment in low-cost autonomous defeat systems.

III. US Defense Industry: Market Structure

Market Structure & Valuation Context

US defense primes are characterized by cost-plus contract protection, long-duration revenue visibility (programs of record spanning 15–30 years), and the implicit US government credit backstop. The current cycle is notable for production volume expansion across multiple program families simultaneously. Funded backlog as a multiple of annual sales provides forward revenue visibility, and book-to-bill ratios above 1.0x indicate demand acceleration across the sector.

Current US Prime Contractor Summary

Sub-Contractors & Emerging Defense Platforms

Subcontractors and program-specific suppliers on the critical path of high-rate production programs represent a distinct segment of the defense industrial base. These companies tend to carry less analyst coverage and more concentrated program exposure, meaning their financial performance is closely tied to the production trajectory of specific weapons systems.

Domestic Supply Chain Reshoring: The Phase 2 Structural Imperative

The Ukraine conflict highlighted existing supply chain fragilities, and China's April 2025 'Announcement 18' imposed sweeping export controls on medium and heavy rare earths, including terbium, dysprosium, samarium, and yttrium, as well as related oxides, alloys, compounds, and permanent magnet technologies, exposing a critical strategic vulnerability. In just one example, Chinese magnet shipments to the US fell 74% in May 2025 from the prior year. The US defense industrial base is dependent on imported materials and offshore-manufactured components at exactly the points where that dependence creates the greatest operational risk. The current Administration, with bipartisan Congressional support, has made reshoring defense critical supply chains a funded national priority under the Defense Production Act, NDAA, and Inflation Reduction Act manufacturing provisions.

Five supply chain vulnerabilities require urgent reshoring investment: (1) Rare earth elements and permanent magnets (note: China controls 85%+ of global processing); (2) Solid rocket motor propellants where only single domestic sources for several critical propellants currently exists; (3) Energetic materials and explosive fill (domestic production lines have not kept pace with drawdown rates); (4) Radiation-hardened semiconductors (Currently a Taiwan dependency for advanced nodes fabrication); (5) Specialty metals including titanium, beryllium, and high-purity nickel alloys for turbine engines.

The Pentagon's response has been immediate and financially significant. In July of 2025, the DoD (now often referred to as the DoW), executed a transformational public-private partnership with MP Materials: a $400 million government equity stake, a 10 year floor price guarantee, a commitment to purchase 100% of MP's rare earth magnets, and an additional $150 million to support heavy rare earth separation which is the most critical bottleneck in the entire magnet supply chain. This is the first time the US federal government has become a major shareholder in a critical minerals company, and it is explicitly modeled as the first of many such investments.

• MP Materials (MP): The only active US rare earth mine and processor. $400M DoD equity stake; 10-year floor price; 100% magnet offtake contract. A mandated January 1, 2027 federal prohibition on Chinese-sourced rare earth magnets in military platforms creates a hard demand floor. Pentagon's 'Project Vault' is a $12 billion Strategic Critical Minerals Reserve that provides additional purchasing certainty.

• Energy Fuels (UUUU): Pivoting to heavy rare earth oxide processing at its White Mesa Mill in Utah, targeting commercial production of dysprosium and terbium oxides by late 2026. These are exactly the elements targeted by China's Announcement 18 controls.

• Chemring Group (LSE: CHG): A UK listed supplier of energetic materials, pyrotechnics, and countermeasures with significant US operations. Dual exposure to US Army energetics restocking and UK/NATO munitions build-out. The FY2026 US defense bill added $1.3 billion for missile procurement with munitions identified as a multi-year priority.

IV. European Defense Industry: Building an Industrial Base from Scratch

The European Rearmament Imperative

Even more so than the US, Europe's defense industrial rebuild is not a rearmament cycle but rather an industrial creation event. Thirty years of post-Cold War demobilization, compounded by the 2008 austerity shock, has left most European nations attempting to recreate manufacturing capacity, skilled workforces, raw material supply chains, and design capabilities that were dismantled over a generation. Russia's full-scale invasion of Ukraine has made this an emergency.

The NATO 2% GDP commitment, honored by fewer than ten allies in 2021, is now being superseded by higher targets across the continent. Germany's EUR 100B+ Sondervermogen special defense fund is supplemented by an ongoing structural budget commitment. Poland has reached 4% GDP, the highest in NATO. The UK has committed to 2.5%. France's six-year Military Programming Law commits EUR 413B through 2030. Nordic nations accelerated their NATO integration following Sweden's accession.

According to SIPRI data published April 27, 2026, European military spending rose 14% to $864 billion in 2025, representing the fastest annual growth rate in Central and Western Europe since the end of the Cold War. The 29 European NATO members spent a combined $559 billion in 2025, with 22 meeting the 2% threshold. Germany reaching 2.3% of GDP for the first time since 1990 at $114 billion (+24% YoY). Spain's military spending jumped 50% to $40.2 billion. At the Hague Summit in June 2025, all NATO allies except Spain committed to 3.5% of GDP by 2035, with an additional 1.5% for defense-adjacent infrastructure. The aggregate European defense spending increase from 2024– 2030 represents the largest sustained expansion since the Korean War.

The combined order backlogs of major European defense firms reached €311 billion by end-2024 (up 103% from 2021) and have continued to grow materially into 2025–26. Rheinmetall's backlog alone was €63.8 billion at end-2025, up from €24.5 billion in 2021. EU member states are expected to spend more than €360 billion in 2025, and the EU has created a €150 billion Security Action for Europe (SAFE) rearmament loan fund for member states.

A critical distinction for investors: Europe is not simply restocking existing inventory. It is building production lines, design teams, supply chains, and facilities for systems that have never been manufactured at industrial scale in Europe or in many cases, never manufactured in Europe at all. This transforms the time horizon of the investment: a restock takes months; an industrial build takes a decade. The duration of contracted revenue streams flowing to European primes is commensurately longer and the barriers to entry for competition are commensurately higher.

European Prime Contractor Summary

The European Sky Shield: A Continental Air Defense Architecture

The European Sky Shield Initiative (ESSI), launched by Germany in 2022 and now including 21 nations, is coordinating a continental-scale integrated air defense system across three layers: 1. Long- range (THAAD/Arrow 3), 2. Medium-range (Patriot/SAMP-T/NASAMS), and 3. Short-range (IRIS-T SLA/SLS, Mistral, Skyranger). Each layer maps to distinct industrial participants and distinct production expansion timelines.

Critical investor distinction: Europe is not restocking existing inventory. It is building production lines, design teams, supply chains, and facilities for systems that have never been manufactured at industrial scale in Europe. This makes the revenue duration of contracted streams commensurately longer as well as the barriers to competition commensurately higher than a simple restocking cycle. Rheinmetall's target to increase 155mm ammunition production from 60,000 rounds per year in 2022 to 1.5 million rounds per year by 2027 illustrates the magnitude of the industrial creation underway.

Rheinmetall is building Europe's largest ammunition plant in Lower Saxony and has announced production facilities expansion across Germany, Romania, Lithuania, and potential US and UK facilities.

The European Sky Shield Initiative (ESSI), launched by Germany in 2022 and now including 21 nations, is attempting to coordinate a continental-scale integrated air defense system. Unlike NATO's Cold War air defenses, which relied on fixed installations and a relatively static threat environment, ESSI must address ballistic missiles, cruise missiles, hypersonic glide vehicles, and mass drone swarms simultaneously. The three-layer architecture (described below) maps directly onto the structural analysis of the sector.

1. Long-range / upper tier (THAAD / Arrow 3): Theater ballistic missile defense. Germany's Arrow 3 purchase from Israel sets the template for Baltic and Polish follow-on procurements. Key industrial participants include Boeing, Israel Aerospace Industries (IAI), and Lockheed Martin for THAAD. 2. Medium-range layer (Patriot / SAMP-T / NASAMS): The most active current procurement tier. French Italian SAMP-T (MBDA) upgrades alongside Patriot expansion and NASAMS orders represent a decade-long production ramp. Key industrial participants include RTX, Kongsberg, and MBDA (jointly owned by Airbus, BAE Systems, and Leonardo). 3. Short-range / point defense (IRIS-T SLA, Mistral 3, Skyranger, HV-SHORAD): The layer most exposed to the proliferating drone threat demonstrated in Ukraine. Diehl's IRIS-T family, MBDA's Mistral, and Rheinmetall's Skyranger are the primary platforms addressing this growing demand. The production constraint in European air defense is not demand, which is now funded and legislated, nor is it political will, which has been demonstrated decisively. The constraint is industrial capacity: trained engineers, machinists, propellant chemists, precision component suppliers, and the facilities to house them. Rheinmetall's planned EUR 3B+ investment in new production infrastructure across Germany, Romania, Lithuania, and potential US and UK facilities is the most direct public market expression of the European industrial creation theme.

V. Thematic Framework: Defense Supercycle Structure

The Thematic Architecture

Key Structural Themes

Theme 1: Interceptor Restocking (Phase 1, Immediate)

The most certain near-term revenue driver. The FY2026 defense bill granted multiyear procurement authority for PAC-3, SM-6, THAAD, AMRAAM, Tomahawk, LRASM, JASSM-ER, and SM-3 IB, providing legislative certainty for production ramp-up across all key interceptor families.

• Lockheed Martin (LMT): Record $194B backlog; book-to-bill 1.2x; PAC-3 MSE sole-source; JASSM-ER multi-year contracted; PrSM entering production. 2026 guidance $77.5–80B. • RTX Corporation (RTX): FY2025 defense backlog $107B; total backlog record $271B in Q1 2026; five DoD framework agreements for Tomahawk, AMRAAM, Standard Missiles. 2026 guidance $92–93B. • Kongsberg (KOG): Defense backlog NOK 125.4B record; missiles & air defense NOK 98B alone; US and Australia missile factory construction commencing 2025. Maritime business spinning off April 2026, leaving a pure-play defense vehicle.

Theme 2: Production Expansion Infrastructure (Phase 2 Core)

As Phase 2 takes hold, the binding constraint shifts from demand to production capacity. Companies investing in new production lines and supply chain infrastructure will generate superior volume-driven earnings growth with high incremental margins.

• Rheinmetall (RHM): FY2025 revenue €9.9B (+29%); 2026 guided €14–14.5B (+40–45%); backlog €63.8B; backlog expected to reach €135B in 2026; Vision 2030 targets €50B revenue. • General Dynamics (GD): Marine Systems $16.7B revenue (+16.6%); backlog $52.3B; Block VI Virginia-class and Columbia Build II awards anticipated. Gulfstream provides economic cycle hedge.

• HII (HII): Revenue $12.5B record; backlog $53.1B record; all three divisions hit record revenue; targeting 15-SSN multi-year contract. Only US carrier builder; pure-play shipbuilding leverage on AUKUS. • TransDigm (TDG): Sole-source pricing power on components across virtually all defense platforms. Volume uplift from production rate increases flows through at near-100% incremental margin.

Theme 3: US Domestic Supply Chain Reshoring

China's Announcement 18 export controls and the January 2027 US prohibition on Chinese-sourced magnets in military platforms have transformed rare earth reshoring from a medium-term theme to an immediate operational necessity.

• MP Materials (MP): $400M DoD equity stake; 10-year floor price; 100% magnet offtake contract; 'Project Vault' $12B reserve provides additional demand certainty. Only active US rare earth mine; Fort Worth magnet plant operational. The DoD deal has been described as a potential new framework for rare earth supply chain partnerships in the West. • Energy Fuels (UUUU): Heavy rare earth oxide processing targeting late 2026 commercial production of dysprosium and terbium, the exact elements targeted by China's Announcement 18. • Chemring Group (CHG): UK-listed energetic materials and countermeasures supplier with major US operations. Dual exposure to US restocking and UK/NATO munitions expansion.

Theme 4: European Air Defense Industrial Build-Out

EU member state backlogs across major prime contractors have more than doubled since 2021. The SAFE €150B loan fund provides financing for member states to place long-duration contracts. Production investment is committing revenue streams for 2027–2035+.

• Rheinmetall (RHM): Also, the dominant European participant across Theme 4 categories, including 155mm artillery, IRIS-T electronics, Skyranger, Lynx IFV. 1.5 million rounds per year production target by 2027 vs. 60,000 in 2022. • Saab AB (SAAB B): Backlog SEK 274.5B record; 72% international; Gripen wins across Eastern Europe; Carl-Gustaf anti-tank at record global demand; A26 submarine for Nordic navies; Thailand and Colombia potential new Gripen customers. • Leonardo SpA (LDO): Significant European defense prime with AESA radar for Eurofighter; AW149 helicopter export wins; Leonardo DRS (US subsidiary, RADA owner) posted +20% revenue growth.

Theme 5: Autonomous Systems & Phase 3 Optionality

The FY2027 budget request proposes $3.5 billion for the F-47 Next Generation Air Dominance fighter and significant Collaborative Combat Aircraft funding that establish the policy and budget foundation for Phase 3 acceleration.

• Palantir Technologies (PLTR): Maven Smart System confirmed as DoD's designated Army AI platform; DoD letter citing PLTR as designated AI platform published. 25–30% revenue growth; GAAP profitable; AIP commercial expansion provides earnings durability beyond defense. • Kratos Defense (KTOS): XQ-58A Valkyrie CCA demonstrator; UTAP-22 Mako high-performance aerial target; SRM propellant operations. A leading participant in low-cost autonomous combat aircraft development. • Anduril Industries (private): Fury CCA, Lattice AI, counter-UAS Anvil. A notable private defense technology company that has rapidly won major DoD contracts across autonomous systems and counter-drone platforms.

•

VI. Risk Framework & Key Watchpoints

US Market Risks

1. Continuing Resolution / Budget Risk: CR-funded budgets prevent new program starts and limit rate increases. Extended CRs create near-term headwinds for contractors awaiting new awards. Congressional budget timelines are a key watchpoint. 2. Fixed-Price Contract Execution Risk: New development programs on fixed-price terms (B-21, HACM) can generate significant losses if technical challenges emerge. Northrop's B-21 margin profile warrants quarterly monitoring. 3. Regulatory / Consolidation Risk: DoD and FTC have restricted large defense M&A (blocking Lockheed-Aerojet in 2022). Limits upside from transformational mergers; protects existing competitive structures. 4. Workforce Constraints: Skilled aerospace manufacturing workers (e.g. welders, machinists, nuclear-certified shipbuilders, etc.) are currently the human capital constraint on production rate increases. Wage inflation and attrition rates at major shipbuilders are critical leading indicators of production capacity.

European Market Risks

1. Political Continuity Risk: European spending commitments are made by current governments. AfD influence in Germany, potential Le Pen-aligned French government, or Eastern European political shifts could moderate, though not reverse current commitments. The threat environment makes meaningful reversals structurally unlikely. 2. Industrial Capacity Lead Times: Production line investments committed today will not yield full output for 3–7 years. Execution risk during the build phase is real; quarterly delivery milestones and capex deployment rates are key indicators of progress. 3. FX Exposure: USD based investors face EUR/GBP/NOK/SEK currency translation risk. European companies with USD export revenues (Saab, Kongsberg, Leonardo helicopter exports) carry partial natural hedges. 4. MBDA Illiquidity: MBDA, Europe’s most important missile manufacturer is entirely private. Investors can access it only indirectly via Airbus, BAE, and Leonardo shareholdings. If it were to occur, a MBDA IPO would be a significant event for the European defense sector.

Threat Scenario Analysis

VII. Conclusion: A Generational, Policy-Backstopped Industrial Shift

The global defense sector is at a structural inflection driven by converging geopolitical and industrial forces. Unlike commodity supercycles or credit cycles, the defense supercycle is underwritten by sovereign budgets, NATO treaty obligations, and great-power competitive dynamics that make demand fundamentally non-discretionary across a multi-decade horizon.

The data sourced for this report, spanning official NATO spending statistics, SIPRI global expenditure data12, and audited company earnings releases from Lockheed Martin, RTX, General Dynamics, HII, Northrop Grumman, Rheinmetall, Kongsberg, BAE Systems, Saab, and Leonardo clearly confirm that the defense supercycle thesis is not speculative. It is now measurable, contracted, and accelerating.

US primes are reporting record backlogs: Lockheed Martin at $194 billion, RTX at $268 billion and growing to $271 billion in Q1 2026, GD Marine at $52.3 billion, HII at $53.1 billion, Northrop at $95.7 billion. European primes are equally compelling: Rheinmetall's €63.8 billion backlog — 91% of 2026 guided sales, is growing toward €135 billion; Kongsberg's defense backlog of NOK 125.4 billion covers 55% of orders scheduled for delivery in 2027 and beyond; Saab's SEK 274.5 billion backlog reflects 72% international orders.

The three-phase framework: 1. Interceptor Restocking, 2. Production Expansion and 3. Autonomous Transition, provides a structured framework for understanding the duration and evolution of the cycle. US primes are characterized by cost-plus protected margins and long-duration backlogs. European primes are experiencing higher growth rates from a lower industrial base with strong political tailwinds and long contract duration. Sub-contractors carry concentrated program exposure that amplifies production rate changes. Emerging autonomous systems companies are positioned in a rapidly growing segment of the defense industrial base.

The defense sector's structural characteristics, including long-duration government-backed revenue, bipartisan political support, and expanding international demand, make it a distinctive segment of the global industrial landscape.

FINAL NOTE: The decline in US military expenditure in 2025, caused by the absence of new Ukraine financial assistance and not by reduced procurement is, as SIPRI describes, 'likely to be short-lived.' The US FY2027 budget proposes $1.5 trillion. The FY2026 topline was already historic at $1 trillion. The defense supercycle has years, not months, to run. Patient, conviction- driven long positions in the names identified in this report will materially outperform short-term geopolitical trading over the investment horizon of this report.

Appendix A: US Weapons Programs by Category: Supplier Details

A.1: Air Defense Interceptor Systems

A.2: Long-Range Precision Strike

A.3: Hypersonic Programs (Offense & Defense)

Appendix B: European Weapons Programs | Supplier Details

B.1: European Air Defense Programs

B.2: European Strike & Munitions Programs

B.3: European Combat Aircraft Programs

Appendix C: US Defense Supply Chain Reshoring

Critical Programs

Appendix D: Research Report Source List

All financial data, spending statistics, program details, and company guidance cited in this report are derived from the primary sources listed below. Where multiple sources cover the same data point, the most authoritative primary source is cited first.