5 Best Defense Stocks to Buy According to Hedge Funds

October 31, 2026 - 22:54

U.S. defense stocks have largely struggled in 2026, even as geopolitical conflicts persist and military budgets expand worldwide. The NYSE Arca Defense Index has reflected this weakness, with several major contractors underperforming the broader market. Investors have been watching hedge fund positioning closely for signals about which companies might weather the downturn.

Hedge funds have continued to favor certain defense names despite the sector's soft performance. Their picks tend to focus on firms with steady government contracts, diversified product lines, and exposure to areas like missile defense, cybersecurity, and aerospace systems. These companies are often viewed as more resilient when broader market conditions pressure valuations across the sector.

The disconnect between rising global military expenditure and weak stock performance has surprised some analysts. Several factors appear to be at play, including budget uncertainty in Washington, supply chain constraints, and concerns about how quickly new contracts translate into revenue. Valuation concerns have also weighed on stocks that rallied strongly in previous years.

Despite these headwinds, hedge funds have not abandoned the sector entirely. Their selections suggest confidence in specific companies rather than broad exposure to defense as a whole. The focus appears to be on firms with clear growth catalysts and strong backlogs that can support earnings through periods of uncertainty.