How is defense investment evolving, and how does that affect the wider industrial outlook for 2026?
Cliff Bayer: U.S. defense spending has increased, both in absolute dollars and as a percentage of GDP. Priority spending areas are shipbuilding, unmanned aircraft, drones and counter-drone technology, and missile defense.
Rob Jurd: New European spending targets of 3.5% of GDP were confirmed at the recent NATO summit. This will drive revenue for aerospace and defense companies both in North America and Europe. A further 1.5% commitment relates to infrastructure, cyber security and resilience, and these are likely to be provided by non-defense and dual-use companies.
Spending in Europe is going to rise by close to €600 billion per annum. In contrast, the combined 2024 revenue of the largest 10 defense companies is roughly €50 billion. This is why European defense companies are trading at all-time highs.
Claire Sturgess: Canada heads into 2026 with a much more focused defense posture. The government’s new defense investment agenda has a ‘Buy Canada’ mandate. We expect this to benefit businesses in the aerospace, shipbuilding, advanced manufacturing, cybersecurity, AI, and quantum technology sectors, among others.
How is cross-border collaboration evolving between Canada and Europe?
Jurd: Canada is exploring procurement of the Swedish Gripen fighter jet, with manufacturing collaboration between Saab and Bombardier. Further, the Canadian defense company CAE signed Saab up as its preferred supplier for its GlobalEye airborne early warning system. But Canada and Europe still remain highly dependent on U.S. defense.
Sturgess: A commitment to a significant increase in Canadian spending on European space agency programs should increase contract opportunities for Canadian companies. Canada is also the first non-European country granted preferential access to SAFE, the EU’s military purchasing fund.
"A commitment to a significant increase in Canadian spending on European space agency programs should increase contract opportunities for Canadian companies.”
Claire Sturgess, Head of Canadian Industrials and CME Investment Banking
How are European manufacturers tackling capacity constraints?
Jurd: Global supply disruptions due to tariff changes and other geopolitical impacts have exposed structural capacity gaps across numerous areas, such as electronic subcomponents.
Modernization is under way. It's helpful that Europe has a highly skilled labor base, and is among the leaders in discrete automation, for example, in automotive manufacturing and robotics. But it could take some time to utilize European industrial companies that don't have current exposure to the defense sector.
“Global supply disruptions due to tariff changes and other geopolitical impacts have exposed structural capacity gaps across numerous areas, such as electronic subcomponents.”
Rob Jurd, Head of Industrials for Europe
What are key opportunities in 2026 as the wider industrial sector intersects with defense?
Bayer: The military is increasingly seeking to break away from slow traditional procurement and embrace innovation. The key is the prioritization of software, and we've seen defense disruptors win new contracts away from some of the larger defense primes.
Jurd: Defense tech startups are entering procurement cycles faster than before. Systems in the battlefield now need to be interoperable from the start, versus retrofitted. Open architecture, common design standards are a particular challenge in Europe, because many of these companies aren't software-first.
Sturgess: In Arctic sovereignty and surveillance, the dual-use tech spillover is relevant both in developing tools to observe how that environment is changing from a climate perspective, and in building a strong Arctic defense system.
“The key is the prioritization of software, and we've seen defense disruptors win new contracts away from some of the larger defense primes.”
Cliff Bayer, Head of Aerospace, Defense and Government Services
What does this mean for deal activity?
Bayer: We're seeing a large uptick in M&A activity focused on the defense space. U.S. companies are trying to position themselves for the increasing level of European defense spending. I would expect to see more transactions at the mid-cap range.
Jurd: In Europe we have seen a focus on the supply chain, for OEMs, to ensure capability delivery is there. Large defense companies are also trying to assess how to invest and partner with defense tech companies, to foster innovation.
There is a significant desire to deploy private capital into the sector, in the context of governments and public markets not necessarily being able to fund growth. On the public market side, there have been quite a few defense-related IPOs, including TKMS this year.
Strategics are looking to work in partnership, take minority investments, or come up with unique structures – perhaps to have a very small anchor investment to support a company, but then signing MOUs and working with them to supply capability.
Bayer: In the past, private equity sellers have been hesitant to exit through IPOs because of the time requirement. But given where sector valuations are today, companies are evaluating that quite seriously. You're seeing almost a doubling of public market valuations in the last five-to-six years.
Jurd: There has been a much higher allocation in IPOs over the last few years to European investors, predominantly because of ESG concerns being alleviated through government pressure. We have seen a complete shift in investor sentiment towards the defense sector over the last couple of years.
How will these trends evolve in 2026 and how is RBC supporting clients to navigate the defense investment landscape?
Sturgess: Our clients are encouraging us to take on the opportunity of educating investors around the defense ecosystem, including in the space system, which remains a very niche and poorly understood sector in the investment community.
Jurd: RBC is well placed to help clients think through the convergence that is happening as we're seeing more dual-use technologies and non-defense companies, making forays into the space.
Bayer: The global threat environment is only increasing. Companies are looking at how to best position themselves to support global economies in that environment, which takes capital.
What we'll see in 2026 is different ways to help finance this growth, whether it be through the private markets, the public markets, or through debt capital.
