Defense and Security Market Forecast: Top Trends for Defense and Security in 2026

US rearmament a major defense catalyst

The centerpiece of the 2026 defense outlook is the unprecedented scale of proposed spending in the US.

If given the green light, the nation's US$1.5 trillion budget would dramatically boost the money allocated to the industry, with a significant portion of the funds earmarked for the Golden Dome project.

The integrated air and missile defense initiative is already attracting massive interest from both legacy defense sector names like Lockheed Martin (NYSE:LMT) and Northrop Grumman (NYSE:NOC), as well as high-growth disruptors like Palantir Technologies (NASDAQ:PLTR) and Anduril Industries.

Outside the US, global demand for advanced defense systems is being bolstered by a new era of multinational procurement. Canada’s recent entry as the first non-European member of the Security Action for Europe military purchasing fund illustrates a growing trend toward joint acquisition programs.

Additionally, the NATO Innovation Fund (NIF) represents the alliance’s “commercialization machine,” a high-tech investment engine pouring over 1 billion euros into deep-tech startups.

The fund is currently prioritizing disruptive tools like autonomous medical tech for field surgery and tactical combat clouds that allow drones and satellites to share data instantly.

While the NIF bets on startups, the European Sky Shield Initiative is modernizing NATO’s physical defenses. Led by Germany, this 24 nation alliance focuses on buying advanced air defense systems in bulk.

These international parternships are designed to achieve economies of scale for high-cost tech, creating more predictable and consolidated revenue streams for companies that can navigate complex cross-border contracts.

Cybersecurity as the digital frontline

At the same time, organizations and governments are now facing an environment where agentic AI is being used to supercharge the cyber arms race. In fact, research from the World Economic Forum indicates that 94 percent of industry leaders view AI as the most significant driver of change this year, as threat actors use it to automate compromise chains and generate highly realistic deepfakes for social engineering.

This surge in sophisticated threats has forced a shift in corporate priorities.

CEOs have moved their focus from traditional ransomware toward cyber-enabled fraud and phishing, leading to a doubling of the percentage of companies implementing structured AI security governance since early 2025.

This change has created tailwinds for firms like CrowdStrike Holdings (NASDAQ:CRWD), Pal Alto Networks (NASDAQ:PANW) and Zscaler (NASDAQ:ZS), which specialize in zero-trust architectures and automated incident response.

Space: The new high ground for AI

The space industry is expected to move beyond the launch race in 2026.

The focus for defense contractors is now on orbital edge computing, where satellites process data locally rather than transmitting raw files back to Earth. This capability is crucial for modern missile defense as it allows for the near-instantaneous detection and tracking of hypersonic threats.

The successful deployment of the Genesis 1 satellite, which runs AI models directly in low-Earth orbit, has proven that the next generation of defense will be won by whoever possesses superior processing power in space.

Major contracts are already being awarded for proliferated warfighter space architecture.

For example, Lockheed Martin, L3Harris Technologies(NYSE:LHX), Northrop Grumman and Rocket Lab (NASDAQ:RKLB) have secured hundreds of millions in funding from the Space Development Agency to build out the Proliferated Warfighter Space Architecture, an AI-integrated satellite constellation.

Other companies are also securing significant funding to build mission-specific layers, including Kratos Defense & Security Solutions (NASDAQ:KTOS), Firefly Aerospace (NASDAQ:FLY), True Anomaly and Terran Orbital.

This introduces new cybersecurity challenges, as satellites are now directly reachable from the internet, necessitating the adoption of post-quantum cryptography to secure sensitive transmissions against future computing threats.

Strategic risks for defense growth and investor realities

While the US' record-breaking defense budget proposal has boosted sentiment in the market, the sector faces significant capacity constraints, with the industrial base currently struggling with labor shortages and production backlogs that may limit the immediate economic impact of a potential 2026 budget surge.

For investors, a key metric to consider is the widening “book-to-bill” gap.

According to a recent PwC report on aerospace and defense industry trends, defense backlogs in the US have surged by 25 percent in just two years, reaching US$747 billion.

This is most visible in the shipbuilding and munitions sectors, where the US Navy procures Virginia-class submarines at a rate of two per year, but the actual shipyard throughput remains stuck at approximately one per year.

In its 2026 Aerospace and Defense Industry Outlook report, Deloitte explains that this situation is rooted in a shortage of specialized engineering and skilled trades, projecting that the manufacturing sector could face nearly 1.9 million unfilled jobs by 2033 if current recruitment trends persist.

Deloitte suggests in another report that to bridge this gap, forward-looking firms are pivoting toward agentic AI — autonomous systems that can reason and manage supply chain disruptions without human input — to maximize production uptime and capture institutional knowledge from a rapidly retiring workforce.

In 2026, the winners in this sector will be the companies that can convert demand into delivery through smart manufacturing, rather than those just holding the largest contracts.

Investor takeaway

For investors, the most valuable defense and cybersecurity companies in 2026 may be those that can bridge the gap between gray-area innovation and applications in the real world.

Expert market watchers believe the winners of this cycle will be those that can deploy physical AI at scale, while maintaining a hardened, forensic-ready digital defense.