Key Takeaways

  • NATO defense spending blew past $1.4 trillion in 2025, with European allies and Canada ramping up outlays by 20% year over year to $574 billion. All member states finally cleared the 2% of GDP threshold.
  • The 2025 Hague Summit completely reset the baseline, targeting 5% of GDP by 2035 (3.5% on core defense, 1.5% on resilience). This creates a decade-long structural tailwind that the market is only just beginning to price in.
  • Lockheed Martin, RTX Corp, and Northrop Grumman are sitting on a combined backlog north of $557 billion. Meanwhile, L3Harris Technologies and Palantir Technologies are aggressively capturing the high-margin modernization spend.

The Budget Numbers Are No Longer Aspirational

For years, NATO allies treated the 2% of GDP target as a polite suggestion rather than a hard floor. That dynamic broke in 2025. Total alliance defense expenditures topped $1.4 trillion, driven by a massive $574 billion injection from European members and Canada, a 20% jump from the prior year.

Poland continues to lead the pack at 4.3% of GDP. Germany hit 2.14% with a clear line of sight to €152 billion by 2029, while the UK and France posted 2.31% and 2.05%, respectively. Stateside, the FY2026 NDAA locked in $855.7 billion for the DoD, backed by $858.9 billion in base discretionary appropriations.

But the real catalyst came out of the Hague Summit. By committing to 5% of GDP on defense by 2035, NATO effectively signaled a tripling of the current 2% floor. For capital allocators, the takeaway is clear: this isn’t a short-term geopolitical reflex; it’s a structural, ten-year procurement cycle.

Prime Contractors: Record Backlogs, Steady Cash

The Q4 2025 earnings from the three largest U.S. defense primes show exactly what a procurement super cycle looks like on a balance sheet.

Lockheed Martin (NYSE:LMT) remains the default institutional anchor. The company posted Q4 adjusted EPS of $5.80 on 6% revenue growth, generating $6.9 billion in FY25 free cash flow. Sitting on a $194 billion backlog and trading at a P/E of 28.6 with a $141.1 billion market cap, LMT is steady capital deployment in action, recently adding a $178 million F-35 modification to the pile.

RTX Corp (NYSE:RTX) posted the most aggressive top-line expansion, with Q4 revenue surging 12.1% year over year and adjusted EPS hitting $1.55. With the sector’s largest backlog at $268 billion, bolstered by a $1.6 billion F135 engine sustainment win, RTX generated $7.9 billion in free cash flow.

Northrop Grumman (NYSE:NOC) delivered Q4 EPS of $7.23 on 10% revenue growth. The backlog is currently parked at $95.7 billion, supporting $3.3 billion in free cash flow. Recent wins, including $2.5 billion for GEM 63 rocket motors and $4 billion in restricted space programs, highlight their pipeline strength.

With valuation multiples stretching from NOC’s 23.3 to RTX’s 38.9, the market is aggressively pricing in RTX’s dual commercial-defense exposure over NOC’s pure-play defense model. Regardless of the premium you’re willing to pay, these three names are sitting on $557.7 billion in combined backlogs, offering a level of revenue visibility almost non-existent in other sectors.

Defense Tech: Where Modernization Revenue Is Accelerating

While the legacy primes are busy bending metal and building the heavy platforms, the real margin expansion is happening inside the software, AI, and electronic warfare systems powering them.

L3Harris Technologies (NYSE:LHX) might look sluggish on the surface with Q4 adjusted EPS of $2.86 and only 2.3% revenue growth. However, looking past the top-line print reveals a highly strategic contract pipeline. The company is actively expanding its footprint in electronic warfare and secure communications, recently securing an $843 million satellite contract from the Space Development Agency. As NATO modernizes its command-and-control infrastructure, LHX is positioned directly in the flow of capital.

Palantir Technologies (NASDAQ:PLTR) is a completely different beast. Q4 revenue exploded 70% year over year, dropping $2.27 billion in free cash flow with remaining deal value hitting $4.38 billion. A recent $448 million Navy shipbuilding modernization contract proves their government pipeline is only accelerating. Trading at a blistering P/E of 232 on a $334.7 billion market cap, PLTR isn’t priced as a defense contractor, it’s priced as the operating system for modern warfare. If you believe defense AI is the primary growth vector, PLTR is the purest play on the board.

The Trade Going Forward

The Hague commitment changes the math for the entire sector. If NATO actually executes on driving 5% of GDP into defense by 2035, we are looking at hundreds of billions in fresh annual capital looking for a home across platforms, space systems, and AI integration.

The play here isn’t just about parking capital in legacy defense names and waiting for dividends. The real alpha over the next four to six quarters lies in tracking how efficiently the primes convert their half-trillion-dollar backlog into recognized revenue, and watching how aggressively tech-forward names like LHX and PLTR absorb the modernization budgets. The spending floor has been permanently raised, the upside now belongs to whoever executes the fastest.

Benzinga Disclaimer: This article is from an unpaid external contributor. It does not represent Benzinga’s reporting and has not been edited for content or accuracy.