Conventional Weapons Continue to Generate Growth
Drones and artificial intelligence are altering military operations, but recent results from major U.S. and European defense companies show that tanks, fighter jets and established missile systems remain important sources of business. According to CNBC, spending on emerging battlefield technology is often adding to the markets served by existing contractors rather than replacing demand for their traditional products.
Lockheed Martin reported a 24% year-on-year increase in third-quarter revenue from its missiles business, while RTX won multibillion-dollar contracts for established missile systems. German supplier Renk recorded a 46% increase in orders for its military vehicle business during the first nine months of the year. Those figures underscore the continuing role of conventional equipment as governments expand and replenish their arsenals.
New Technology Is Being Built Into Existing Platforms
The distinction between traditional weapons and newer defense technology is becoming less clear. Hensoldt reported 52% revenue growth in its optronics business, which supplies optical and sensor technologies. Chief Financial Officer Christian Ladurner told CNBC on Thursday that much of that expansion came from equipment used in tanks and armored vehicles, supported by European governments rebuilding their conventional military capabilities.
Morningstar's assessment is that drones are changing how established platforms operate rather than simply making them obsolete. Tanks and other weapons are increasingly connected to data-driven battlefield networks, creating demand for sensors and related systems alongside the underlying vehicles. For incumbent suppliers, this means the transition toward more autonomous and connected warfare can create additional work within existing product lines.
Air Defense Faces Threats From Drones to Ballistic Missiles
Counter-drone defenses represent another expanding market for established manufacturers. Rheinmetall's air defense business, which includes systems designed to counter drones, reported revenue growth of 63%. NATO plans to invest more than $40 billion in counter-drone capabilities over the next five years, according to CNBC. Secretary General Mark Rutte has warned that drones have fundamentally changed modern warfare.
Ladurner also pointed to stronger demand for air defense as armed forces confront threats ranging from small unmanned aircraft to ballistic missiles. He described the market as underfunded despite annual growth of 20%. CNBC reported that limited supplies of Lockheed Martin-produced Patriot interceptors are particularly consequential for Ukraine after U.S. use during the Iran war depleted much of its stockpile. The interceptors can engage high-speed missiles, making supply constraints relevant beyond the fight against drones.
Large Order Books Meet Delivery and Valuation Concerns
Major defense contractors have accumulated larger order books over the past five years as governments increased military spending, with Russia's full-scale invasion of Ukraine in early 2022 reinforcing that trend. Analysts cited by CNBC generally regard the rearmament cycle as structural and expect it to persist even if the wars in Ukraine and Iran end. Europe faces a particularly large rebuilding task after decades of military underfunding, alongside uncertainty about U.S. security commitments and Russia's future actions.
That demand has not insulated defense shares from setbacks. Concerns that valuations had moved ahead of companies' ability to deliver, together with project delays and contract cancellations, weighed on the sector this year. Rheinmetall reduced its full-year outlook because of project delays despite strong air defense growth. Ukraine's battlefield use of drones has also raised investor questions about whether newer technologies could eventually erode demand for conventional equipment.
U.S. Politics Adds Uncertainty to Spending Expectations
Defense stocks have faced further pressure following Democratic victories in the U.S. midterm elections. TD Cowen analyst Roman Schweizer told CNBC's "Morning Call" on Thursday that Democratic control of Congress makes a proposed $1.5 trillion budget unlikely and could constrain military spending growth through 2029. Nevertheless, he said the underlying geopolitical considerations had not materially changed, describing defense investment as a multiyear issue while noting budget difficulties and questions surrounding NATO's increased spending targets.
Morningstar analyst Loredana Muharremi told CNBC that Wednesday's decline in European defense shares was driven largely by sentiment. Some investors may anticipate stronger U.S. support for Europe and therefore less pressure on European governments to raise spending, she said. Morningstar nevertheless expects Europe to maintain its plans because closing military capability gaps and building the industrial capacity needed to deter Russia will take years. Budget decisions and contractors' ability to execute projects remain important uncertainties even as demand stays strong.
Source: CNBC