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Key Takeaways and Results from Companies’ 2026 Quarterly Reports
- Quarterly reports show high growth, improved profitability and the conversion of orders into earnings
- We are seeing faster procurement processes, long-term budget commitments and strong order visibility
- Increased investment in R&D and partnerships is strengthening production and the integration of new systems
- Lower valuation multiples provide the sector with a stronger starting point into 2026
| €800 billion European defence expenditure could reach €800bn by 20303 | $4.1 billion Venture capital rounds involving major defence companies in 20265 | 20,1x Median FY27E P/E for European aerospace and defence companies7 |
The defense sector is entering a new phase
Most of the quarterly reports published during the summer confirm that the sector has now entered a new phase of growth. The first phase of the sector’s strong performance was driven by higher defence budgets, larger order backlogs and rising valuations. The new phase is characterised by higher deliveries, improved margins and stronger cash flows. However, this new phase is more demanding for companies, as they must actively eliminate production bottlenecks. These bottlenecks take the form of shortages of factories, personnel, components and subcontractors. The quarterly reports show that many companies are now responding by establishing new facilities, increasing R&D expenditure, completing acquisitions and entering new partnerships.
Several companies are reporting higher volumes, improved margins and stronger earnings. In many cases, order backlogs have reached record levels. Rheinmetall’s preliminary Q2 results provide a clear example. Revenue increased by 69%, while operating profit was approximately 20% above market expectations. [1]
The demand is long-term. It is clearly visible in the order books. We remain positive about the sector, but selection is becoming more important. We prioritize companies that can convert financed demand into deliveries, margins and cash flows.
For many companies, the first half of the year was characterised by weak share-price performance and high volatility. As a result, valuations across the sector have become more attractive. Given the unstable geoeconomic environment, volatility is likely to remain elevated. However, because the sector has entered a new phase of growth, there are favourable conditions for a recovery in share prices. Considering the structural growth that we expect over the next ten years, the sector remains a highly relevant allocation within a long-term investment portfolio.
The sector also has a low correlation with the broader equity market, meaning that exposure to the sector can contribute to effective portfolio diversification.
In this report, we focus on the factors we believe will be most important during the sector’s next phase.
01. From budget to delivery
The defense industry's next growth phase
Faster government procurement, increased transparency, coupled with companies investing in greater production capacity and investing in in-demand capabilities, reduces bottlenecks and delays in the systems. It is now about which companies can increase production, secure supply chains and create profitable growth.
Leading reports from BCG and McKinsey point to the same challenge for European companies. Europe needs to produce more defense equipment and it needs to happen faster. This requires less fragmentation, better planning and clearer demand from states. Our analysis of the sector therefore now focuses on the balance between contracts, capacity and profitability. The table below summarizes this analytical perspective and the signals that companies have given in their quarterly reports [2][3].
| Driving forces | Investor focus | Q2 signal |
| Order intake | Multi-year agreements and long-term sustainable government funding | Record orders provide good visibility. Political control remains a risk. |
| Capacity | New production lines, higher speed and critical supply chains. | New factories are being put into operation. Bottlenecks among suppliers and in the supply of skills are being reduced. |
| Technique | Autonomy, cyber, sensors, space and software. | Acquisitions and partnerships speed up integration. |
| Profitability | Volume, margins, cash flow and return on investment. | Better leverage and future cash flows. The differences between companies are increasing. |
McKinsey estimates that large European defense and defense electronics companies have order books equivalent to about 3.7 times annual sales. This provides good visibility. At the same time, only 49 percent of major European platform deals go to European or domestic suppliers. This shows both a capacity gap and potential for local growth. [3]
Source: McKinsey (2026) [3]
02. Capacity becomes the next competitive advantage
Production capacity: Investments are happening and are having an effect:
Capacity expansion has moved from planning to execution. Higher production rates, new factories, internationalization and a greater role for specialized suppliers show that the industry is actively attacking its bottlenecks. Companies that can increase production the fastest will have the best opportunity to convert order books into revenue.
The upgrade is driving investments in ammunition, engines, electronics, test capacity and personnel. Capacity remains tight, but expansion is now moving from planning to implementation. In addition, companies are increasing their local production and subcontractors are gaining greater importance in the value chain. The table below summarizes a number of important signals about this development that are evident from the recently published quarterly reports.
| Increased production rate | RTX more than doubled ammunition production. L3Harris increased Aerojet deliveries by 60 %. GE Aerospace increased LEAP deliveries by 41 %. Hanwha and Hyundai Rotem delivered faster in Poland. |
| New capacity | L3Harris opens GMLRS factory with double capacity. Saab and Northrop build new facilities for weapons, ammunition and Sentinel. |
| More local production | Kongsberg expands into the US, Australia, Norway and Poland. Indra opens in Kansas. Local production becomes more important in export business. |
| Subcontractors | Kitron and NOTE show how electronics and contract companies become more important when large defense companies (so-called. primes) needs to scale faster. |
Defense companies' sales can vary significantly between quarters. Delivery times and project milestones play a major role. Rheinmetall's Q2 nevertheless shows what happens when capacity, orders and deliveries meet. Higher production and previously postponed deliveries had a clear impact on sales. The long-term trend remains strong, as shown in the chart below.
03. Q2 shows who can deliver
Order intake and higher delivery volumes strengthen the growth picture
The reporting season shows that past orders are now starting to show in deliveries, margins and cash flows. The differences are widening between companies that can deliver and companies that are slowed down by bottlenecks.
Q2 shows higher deliveries, better margins and record order books. The table below presents a brief summary of the reports for five important European defense groups
| Companies and period | Result | Order | Main message |
| Rheinmetall Q2 preliminary. | Revenue €3.29 billion, +69% %. Operating profit €562 million, approx. 20% % above consensus. | Order book over €80 billion. Continued capacity expansion. | Volume and capacity clearly boost results. |
| Saab Q2 2026 | Organic sales +29.8 %. EBIT +41 %. | Order book SEK 318 billion. Major capacity plan underway. | Higher deliveries drive growth and margin improvements. |
| KONGSBERG Q2 2026 | Sales +31 %. EBIT +49 %. Record margin 16.1 %. | Order book NOK 158 billion. Production is being expanded globally. | Capacity and mix provide strong leverage. |
| Thales H1 2026 | Defense revenue +12.9 %. Adjusted EBIT +9.9 %. | Order intake +22 %. Order book €52.4 billion. | Defense drives growth and better profitability. |
| Dassault Aviation H1 2026 | Revenue +46 %, 18.1 % above consensus. | Order book €45.4 billion. 291 aircraft, of which 208 Rafale. | The order book is starting to convert into deliveries. |
04. Asia shows the value of fast delivery
South Korean companies strengthen their global position
The upgrade is global and South Korean companies are strengthening their position through fast series production, competitive lead times and local manufacturing at the customer. The strategy combines rapid delivery capabilities with long-term industrial partnerships.
The defense sector’s transition to a new growth phase is not limited to Europe and the United States. In Asia, too, higher defense budgets and export orders are starting to translate into production and deliveries. South Korea stands out in particular. The table below presents three South Korean defense companies that have demonstrated a strong ability to expand internationally.
Hanwha Aerospace is building on its European position in artillery and long-range combat. The K9 and Chunmoo programs combine deliveries from Korea with local production, maintenance and ammunition in Europe. In the spring, Hanwha also signed an additional contract for K9 systems to Finland. The contract value was approximately KRW 940 billion. The figure below shows deliveries for the two programs since 2024.
Hyundai Rotem illustrates the same competitive advantage. A first batch of 28 K2 tanks was shipped to Poland at the end of June, ahead of schedule, with another 30 tanks expected to follow during the summer. In parallel, the company is preparing local production of the K2PL together with Polish Bumar-Łabędy. The model combines rapid initial delivery with technology transfer and long-term industrial presence in the customer market.
Korea Aerospace Industries also has a growing export pipeline. The KF-21 program is moving from development to production, while cooperation with Indonesia continues. Discussions include a possible export of 16 aircraft, but this should still be considered a potential deal rather than a firm order.
Estimated K9 & Chunmoo deliveries
05. The technological shift is determined by integration, not individual innovations
Innovation and adaptation to new prioritized capabilities will be key
Defense innovation is now about the ability to connect sensors, data, software and action systems into usable systems. Therefore, the importance of system integration is increasing. Small and large companies will complement each other in a sector that needs the rapid delivery of new systems that can be integrated together. The winners will be those companies and partnerships that combine technological speed with industrial scale, certification, customer relationships and life cycle support.
Modern defense capabilities are increasingly built less around isolated platforms and more through integrated networks of sensors, data, software and systems. Start-ups and specialists are increasing the pace of innovation, but large system integration players are needed to certify, produce and implement the technology at an operational scale [4]. The relationship with end customers and states is key.
Primes are thus not being replaced. On the contrary, the Financial Times (2026) shows that they are investing record amounts to gain access to new technology. Primes participated in venture capital rounds worth $4.1 billion in 2026, while global defense-related deals have already exceeded $40 billion. Internal R&D at 13 major defense companies is estimated to have risen by more than 25 % to $11.6 billion between 2021 and 2026.[5]
The relevant question is which ecosystems can combine rapid technology development with industrial scale, certification, customer access and life-cycle support. Small, medium and large companies fulfill different but complementary functions in the same armament. This is evident, for example, in Thales’ planned acquisition of Exail in maritime robotics and navigation and Lockheed Martin’s purchase of Ultra Maritime in underwater technology. Acquisitions and strategic investments are thus becoming a way to both meet technological shifts and more quickly integrate new capabilities into scalable defense systems.[5] In order to meet the large needs and quickly develop new operational capabilities, close interaction between smaller technology companies, specialized suppliers and primes is therefore required.
06. Valuations open the way for a results-driven stock market phase
Innovation and adaptation to new prioritized capabilities will be key
Defense companies have previously traded at a valuation premium that is likely based on stronger growth, clear margins and long-term structural demand. Our view is that these conditions are intact and have actually strengthened. When this premium no longer exists, a good starting point is provided for rising prices.
The graph just below shows that European defense companies trade at a median forward P/E of around 23.35x, which is slightly lower than the valuation on the tech-heavy Nasdaq. The multiples are not fully comparable, but indicate that the sector as a whole is not particularly highly valued relative to other quality and growth segments.[6][7][8][11]
An analysis of the US market by RBC Capital provides a more nuanced picture. The large US defense companies were trading at around 107 percent of the S&P 500's NTM P/E, corresponding to a premium of 7 percent. At the same time, they were trading at only 77 percent of the market's forward P/FCF. The cash flow valuation therefore appears more attractive than the traditional earnings multiple suggests[9]. Our view is that when valuing the defense sector, one should take into account the companies' strong growth, growing order books, long contracts and structural demand. Overall, this suggests that the sector can justify a higher valuation premium.
07. Towards the second half of 2026
Implementation meets fundamental valuation of the companies
Looking ahead to the second half of 2026, the sector's fundamentals remain strong, but the market is likely to reward execution, margin improvements and cash flows more clearly than before. Quarterly reports show that investments in production capacity are starting to have an impact in higher deliveries and profitability.
The focus is now on the companies' ability to meet their delivery plans, improve margins and strengthen cash flow. New factories are being put into operation, production is being internationalized and collaboration between primes, specialists and technology companies is being deepened. This creates room for continued growth and positive estimate revisions.
The European defense sector has underperformed the broader market so far this year, despite resilient earnings estimates. Analysts expect annual earnings growth of 20–30 percent until at least 2028 and see an average upside of around 25 percent to their target prices. At the same time, the sector’s valuation premium to the STOXX Europe 600 has narrowed significantly. The difference between price performance and expected earnings growth has thus created an attractive starting point for a recovery.[10]
Developments will likely continue to vary between companies, but volatility can create attractive entry points. We therefore enter H2 with a clearly positive outlook. The next stock market phase is expected to be less dependent on multiple expansion and more driven by growing earnings and cash flows as record order books are converted into deliveries.
Summary
Stronger fundamentals, record order books and lower valuations than before
The Q2 results show that the industrial scale-up is now starting to have a clear impact on deliveries, profits and margins. As the order books continue to translate into results and cash flows, we see good conditions for the next stock market phase.
The greatest potential lies with those companies that can combine high growth with strong delivery capabilities and with a product offering that adapts to the combination of traditional but also new capabilities in demand.
The main point of this report is that the defense sector has left the first phase of budget-driven multiple expansion and is now entering a more demanding but potentially more sustainable phase. Order books are well-filled, demand is structural and quarterly reports show that capacity investments are starting to yield visible results.
At the same time, the differences between companies are becoming clearer. In the next phase, it is not enough to have exposure to rising defense budgets. The decisive factor will be the ability to scale production, manage supply chains, integrate new technology and convert financed demand into margins and cash flows. Our conclusion therefore remains positive but selective: the defense sector has attractive long-term drivers and an improved valuation position, but the greatest potential lies with companies that can demonstrate that strong demand actually translates into profitable growth.
References
| 1. Rheinmetall Aktiengesellschaft: Q2 significantly exceeds market expectations with record revenue growth and earnings. 29 July 2026 | 6. BlackRock. iShares Core EURO STOXX 50 UCITS ETF portfolio characteristics, 17 July 2026. |
| 2. Boston Consulting Group. Europe's Defense Challenge Is Also a Manufacturing Challenge, July 17, 2026. | 7. Nasdaq Market Intelligence. June, Second Quarter 2026 Review and Outlook, 1 July 2026. |
| 3. McKinsey & Company. Scaling Security: Building Today. Securing Tomorrow, February 2026. | 8. BlackRock Investment Institute. Tech rally grounded in fundamentals, June 2026 |
| 4. GSB Research. Unmanned Aerial Vehicles Industry Report, research copy 27 July 2026. | 9. RBC Capital Markets. Aerospace & Defense 2Q26 Large-Cap Preview, July 21, 2026. |
| 5. Financial Times. Defense giants provide record backing for military start-ups, 26 July 2026. | 10. Bloomberg, Defense Earnings Back Case for Strong Second Half. 31 July 2026. |
| 11. FactSet. P/E NTM, STOXX Europe Targeted Defense Index. 2026-08-03 |
This text has been published by Finserve Global Defence & Security Fund and is intended for information purposes only.
The content does not constitute investment advice and is based on publicly available sources and the fund's own assessments. Historical performance is no guarantee of future results. The value of an investment in the fund may go up as well as down, and there is no guarantee that the investor will get back the full amount invested. The content should not be considered legal or tax advice. Potential investors should consult their own professional advisors before making an investment decision.