2025 saw Palantir win multi-billion-dollar US government contracts and post record quarterly profit, which ultimately helped cement its place as the most valuable defence stock in the world.
NATO members pledged to more than double their defence spending, targeting 5% of GDP by 2035.
The first documented AI-powered cyber-espionage case was reported, in which a state-sponsored Chinese group used Anthropic’s Claude Code to power an entire attack.
Will 2026 be the year in which Silicon Valley is fully integrated into the US defence agenda?
Decades of dependence on a handful of legacy prime contractors (large, long-established companies that have historically dominated major defence contracts) have left the US exposed to production delays, rising costs and a growing innovation gap with rival powers. A reform wave is building as Washington looks to rearm for the artificial intelligence (AI) era.
Tech firms like Palantir [PLTR] and Anduril are winning multi-billion-dollar contracts to build autonomous systems, networked command platforms and cyber defences.
Software is being weaponised.
At the same time, sophisticated cyberattacks on airports, industrial suppliers, retailers and financial institutions have shown that modern warfare now spans both physical and digital infrastructure.
For investors, the 2026 defence and cyber security story could mark the start of a multi-year cycle, as structural reforms, heightened geopolitical tensions and rapid technological advances reshape how these industries operate and create value.
War in Europe, the Middle East and Asia meant defence spending stayed elevated in 2025 after global military outlays hit a record $2.7trn in 2024, the steepest annual increase since the Cold War, according to Stockholm International Peace Research Institute (SIPRI).
With defence budgets rising, 2025 again saw governments fill the coffers of contractors and ammunition makers, as US primes Northrop Grumman [NOC], RTX Corporation [RTX] and Lockheed Martin [LMT] reported strong order books and swollen backlogs driven by demand for missiles, weapons and military aircraft.
The capabilities of Israel’s Iron Dome air defence system were on full display during the Gaza War, which has prompted other nations, including the US and Taiwan, to begin discussing building similar defences of their own. In the US, Northrop Grumman, RTX, Lockheed Martin and L3Harris [LHX] are among the contractors being considered for the Trump administration’s American Golden Dome project, alongside AI software company Palantir.
The multiple-award Golden Dome contracts are valued at about $151bn over 10 years and will see the US deploy air defence capabilities with on-ground and satellite-based systems.
Palantir was seen early on as a frontrunner in partnership with Elon Musk’s SpaceX and drone maker Anduril, but a political falling out between President Donald Trump and Musk has cooled those expectations.
In August, the US Army awarded Palantir contracts worth $10bn. In November, the company reported record quarterly profits and the strongest year-over-year quarterly revenue growth ever. Revenue earned from the US government surged 52% year-over-year in Q3 and accounted for 41% of Q3 sales, the company reported.
On the back of this, and a strong year overall, the stock hit an all-time high of $207.52 in early November, more than doubling its share price in 2025. It has since pulled back approximately 20% from that high by early December.
At the time of writing, Palantir is the most valuable defence contractor in the world, with a market cap of approximately $400 billion.
In Europe, Russia’s threat and pressure from President Trump pushed NATO members to commit to more than doubling defence spending, targeting 5% of GDP by 2035.
In 2024, the average NATO member spend was 2.2% of GDP, just above the previous target of 2%, SIPRI data showed.
Germany led the response, loosening fiscal rules to create a €500bn infrastructure fund before removing caps that had kept defence spending near 1% of GDP.
Dusseldorf-headquartered Rheinmetall [RHM:DE] has been one of the main beneficiaries of the boost in European defence spending. Its OTC shares surged about 170% in the year-to-date as the ammunition maker reported a 20% rise in sales for the first nine months of 2025 and forecast annual growth between 25% and 30%.
Sweden-based jet fighter maker Saab [SAABF] and tank gearbox manufacturer Renk [RNKGF] were among the top winners, with year-to-date gains of 131% and 158%, respectively.
For much of 2025, DroneShield [DRO] was one of the hottest defence stocks on the ASX, lifted by strong demand for its counter-drone systems. The Sydney-listed stock surged more than 700% at one point after the company reported a threefold increase in H1 revenue on the back of larger government orders.
That momentum collapsed after a misleading contract announcement and heavy insider selling, with CEO Oleg Vornik, chairman Peter James, and a director unloading nearly $70m worth of stock in November. Governance concerns have added to the pressure. Taken together, these factors have dragged the stock down 70% from its peak, trimming its year-to-date gain to around 150%.
Cyber security names also turned into major winners in 2025 as a rise in cybercrimes and hacks, alongside the rapid adoption of generative AI technology and autonomous bots, prompted organisations to spend more on protecting their systems and sensitive information.
Cloudflare [NET], which launched a tool that stops bots from scraping website content without consent, climbed 75% year-to-date. CrowdStrike [CRWD] was up 43% year-to-date, despite forecasting weaker H2 results linked to costs from a 2024 outage.
Palo Alto Networks [PANW], the most valuable cyber security firm in the world, dipped into the M&A market to expand its AI-powered cyber security offerings. The company paid $25bn to acquire Israeli company CyberArk Software in July and followed it up with a $3.35bn deal for agentic AI-focused security firm Chronosphere.
The First Trust Nasdaq Cybersecurity ETF [CIBR] is up 14% year-to-date, while the iShares US Aerospace & Defence ETF [ITA] is up 37% in 2025.
2026 is shaping up to be a defining year for the US’s legacy defence contractors. For decades, these firms dominated Pentagon spending after post–Cold War consolidation shrank the US defence industrial base from 51 major contractors to only five. Between 2020 and 2024 alone, Lockheed Martin, RTX, Boeing, General Dynamics [GD] and Northrop Grumman took in 54% of the Pentagon’s $4.4trn in discretionary spending, studies showed.
Experts argue that this concentration has created complacency and slowed innovation. The US Government Accountability Office highlighted this when it reported that Lockheed delivered 110 F-35s in 2024, each delayed by an average of 238 days. US Army Secretary Dan Driscoll also criticised the primes for overcharging the military, pointing to a $47,000 Black Hawk control knob that could be made commercially for $15.
This inefficiency forms the backdrop for what could be one of the most consequential shifts in the industry in decades. The US Department of Defence (DoD) has rolled out sweeping procurement reforms that aim to break dependence on slow, expensive legacy processes and bring commercial technology into the defence ecosystem.
The new approach focuses on off-the-shelf buying, faster procurement cycles, stronger cooperation with Silicon Valley and a fundamental overhaul of incentive structures.
“(The) defence industrial base broadly and the primes in particular, conned the American people and the Pentagon and the Army … The system has changed. You will no longer be allowed to do that to the United States Army,” stated Secretary Driscoll, as reported by Reuters.
DoD’s Tactical Intelligence Targeting Access Node (TITAN) ground station system contract, which AI firm Palantir won over a competing bid from RTX, marked the first time a software company has won the role of prime contractor in more than 70 years.
The TITAN program has already shown what the upcoming reforms can look like in practice. In March, Palantir delivered a prototype TITAN command vehicle, capable of integrating satellite and sensor data into real-time battlefield pictures, on time and within budget, an event described as a “rarity in US defence procurement” by Bloomberg.
Palantir now enters 2026 facing a new challenge as one of the most expensive defence stocks on the market. PLTR trades at about 357 times trailing earnings and 100 times trailing sales, which puts it in a completely different league from the “Big Five” defence primes. For comparison, the major primes typically were trading between 1 and 2.7 times sales and 20 to 36 times earnings. That valuation gap is enormous and it means Palantir has far less room for error going forward.
At $73.35bn, Lockheed Martin’s trailing 12-month (TTM) revenue was nearly 19 times that of Palantir’s TTM revenue of $3.90bn. However, Palantir’s market cap was 246% higher than that of Lockheed Martin.
Investor Michael Burry, who predicted the 2008 financial crisis, is among the PLTR bears. In mid-November, Burry indicated on X that he bought long puts on PLTR. Earlier, he hinted at his view with a cryptic message:
“Sometimes, we see bubbles. Sometimes, there is something to do about it. Sometimes, the only winning move is not to play.”
As discussed earlier, 2026 is set to trigger major reforms across the US defence sector. So what does this mean for the legacy prime contractors?
In short, they are likely to lose some of the influence and advantages they once enjoyed, but they are not disappearing. Instead, they will need to adapt to a far more competitive and fast-moving environment shaped by software-driven defence firms and new procurement rules. For investors, this shift could also create selective value opportunities in legacy prime stocks in 2026, especially if near-term pessimism pushes valuations too low.
Source: Anduril Industries, YouTube
“It’s not that we need to get rid of the primes, that’s idiot’s thinking … We still need them, but we need a whole new generation of AI-based and new technologies too,” Steven Blank, a Stanford University professor and advocate of deeper collaboration between Silicon Valley and the DoD, told Bloomberg.
Their control of complex manufacturing, deep relationships on nuclear, naval and aerospace programs, and entrenched roles in classified projects mean they should continue to benefit from elevated budgets, munitions shortages and the need to replenish aircraft, ships and armoured vehicles through the decade.
Defence budgets themselves look set to remain firm. With world military expenditure already at a record, US, Europe and key Indo-Pacific states are still planning multi-year upgrades rather than signalling cuts.
Modern warfare priorities are also changing the mix of spend. More money is likely to flow toward integrated air-and-missile defence, uncrewed aircraft, electronic warfare and space assets. This trend could benefit nimble, innovation-focused defence companies.
Cyber security spending is set to keep climbing in 2026 as AI makes it cheaper and faster for attackers to launch ransomware, phishing campaigns and large-scale breaches. A survey of 3,887 business and tech executives across 72 countries by PwC revealed that 60% of business leaders rank cyber risk investment in their top three strategic priorities, as shown in the graph below.
2025 showed how quickly attackers are adapting. Hackers are now using AI agents to automate most of the work that once required full teams.
The first documented case of such an AI-driven cyber-espionage campaign involved a state-sponsored Chinese group that used Anthropic’s Claude Code to target dozens of major companies and government agencies. It marked a turning point: AI became not just a tool for hackers, but the engine behind entire attacks.
“The barriers to performing sophisticated cyberattacks have dropped substantially, and we predict that they’ll continue to do so. With the correct setup, threat actors can now use agentic AI systems for extended periods to do the work of entire teams of experienced hackers … Less experienced and resourced groups can now potentially perform large-scale attacks of this nature,” said Anthropic in a report.
Asset / Ticker | Type | Why We’re Watching |
Palantir Technologies [PLTR] | Stock | Provides AI-driven command, targeting and logistics software, with a significant portion of revenue coming from US government contracts. |
RTX Corporation [RTX] | Stock | Core supplier of missiles, interceptors, radars and propulsion for US and allied air and missile defence systems. Potential contender for Golden Dome–style projects. |
Rheinmetall [RHM:DE] | Stock | Ammunition and armoured-vehicle specialist at the centre of Europe’s rearmament and Germany’s spending. |
Palo Alto Networks [PANW] | Stock | Bellwether for next-generation firewalls, SASE and cloud security used by governments and critical infrastructure. |
Cloudflare [NET] | Stock | Provides edge security, DDoS protection and zero-trust services for internet-facing assets. |
BetaShares Global Cybersecurity ETF [HACK] | ETF | Provides exposure to global cyber security giants as well as emerging players across multiple regions. |
First Trust NASDAQ Cyber Security ETF [CIBR] | ETF | Diversified basket of leading cyber security vendors across network, endpoint and cloud. |
iShares US Aerospace & Defence ETF [ITA] | ETF | Bundles major US primes and key suppliers into one instrument. Offers broad exposure to the multi-year rearmament and missile-defence cycle while smoothing program and headline risk. |
Within the Furious Five Outlook Series, defence is where AI, energy and automation become hard power; a place where software meets steel.
Looking forward to 2026, investors will need to stay nimble around defence names, especially those with stretched valuations like Palantir and Rheinmetall. The overhaul of how the US DoD buys weapons and technology should be a key near- to medium-term driver, reshuffling winners and creating selective value opportunities.
Cyber security, by contrast, may offer steadier, longer-term structural growth rather than explosive upside, but still remains increasingly central to the broader security super-cycle.
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