When Valuations Hit Historic Highs: Why 2026 Could Be Treacherous for Defense Stocks

The Valuation Puzzle Nobody Wants to Discuss

Geopolitical tensions are dominating headlines – Ukraine’s ongoing conflict, China’s threat to Taiwan, Middle East instability – and naturally, this has triggered a rush into defense equities. Companies like General Dynamics (GD), Textron (T), Lockheed Martin, and RTX have all posted solid gains as markets price in expanded military spending.

But here’s what few investors are asking: Are these stocks actually worth their current asking prices?

A 20-Year Retrospective on Defense Valuations

To answer that question, let’s examine how defense companies have been valued over two decades. Using enterprise value-to-sales ratios (EV/S) – a metric that accounts for both market cap and net debt – we can see a troubling pattern.

The Numbers Tell a Story:

Between 2004 and 2013, defense companies averaged an EV/S of 1.06x sales. Fast forward to 2014-2023, and that jumped to 1.89x. Over the full 20-year span from 2004-2023, the average settled at 1.40x sales.

But today? The picture has shifted dramatically:

Company Performance Snapshot:

Data sourced from Yahoo! Finance and S&P Global Market Intelligence

What’s Changed in Recent Months

With the exception of Boeing (which modestly declined in valuation) and a handful of names like Leidos and Northrop Grumman holding steady, most defense names have continued climbing. The sector average sits at 2.95x EV/S today – essentially double the historical norm.

Textron (T) and General Dynamics (GD) offer more moderate valuations relative to peers, but even these aren’t particularly cheap when measured against their own 20-year averages.

The Risk Nobody’s Pricing In

Current price-to-sales multiples are approaching triple the levels seen at the turn of the century. If you own defense stocks, this certainly feels like victory. The thesis is “working.”

Yet consider these scenarios:

If geopolitical tensions ease: Ukraine peace negotiations could reduce perceived threats. Trump administration actions might cause countries like Iran and China to recalibrate. Neighboring nations might scale back defense budget increases, cooling weapons sales momentum.

If tensions persist but multiples can’t expand: Defense valuations have already reached historical ceilings. There’s limited room for multiple expansion. If warfare continues but military hardware demand plateaus, defense stocks could significantly underperform the S&P 500 throughout 2026.

The Takeaway for Investors

The rally in defense equities reflects both real geopolitical risk and valuation enthusiasm. Companies like General Dynamics (GD) and Textron (T) remain relatively reasonably priced compared to peers, yet the broader sector has stretched well beyond historical norms.

Before adding exposure, ask yourself: How dependent is my thesis on further multiple expansion? Because if that expansion stops, the downside could be substantial.