The beginning of 2026 has surprised many as President Trump’s plans to expand foreign policy boost defense stocks. In the UK, the FTSE 100 index shows defense companies like BAE Systems, Babcock International, and Rolls Royce gaining 18%, 17%, and 10% respectively by January 8. In Germany, companies such as Rheinmetall and MTU Engineering are also seeing growth, with Rheinmetall up 18% year-to-date. While the FTSE 100 has grown over 1% in 2026, low oil prices are limiting profits for oil companies and retailers, affecting the UK index’s overall performance.

US Defense Stocks Rise

In the US, semiconductor stocks helped lift the market at the year’s start, especially due to ongoing interest in AI. However, there may be a shift toward US defense stocks in light of Trump’s plan to increase defense spending to $1.5 trillion by 2027. Halliburton has risen 12% year-to-date, and Lockheed Martin is up nearly 8%. Even if Trump tones down his rhetoric, his defense spending plans will likely influence the markets. The trends from the first trading weeks in January suggest that defense will be a key focus this year. With such strong starts for defense stocks in 2026, now is a good time to capitalize on this momentum. The significant year-to-date increases in European companies, such as BAE Systems and Rheinmetall, indicate ongoing strength due to geopolitical news. One effective way to invest is to buy call options on these individual stocks or a broader aerospace and defense ETF to benefit from potential gains in the coming weeks. This pattern resembles early 2022, when similar geopolitical events caused defense stocks to soar. For instance, Rheinmetall jumped more than 30% following the escalation of the Ukraine conflict, showing that current price changes might continue as international tensions remain high.

Strategic Investment Opportunities

The current uncertainty is driving up implied volatility, making options more expensive. To keep costs down, we could use bull call spreads. This strategy limits potential gains but lowers initial cash investment. Another option is to sell out-of-the-money put spreads on strong US firms like Lockheed Martin, which allows us to earn premiums by betting the stocks won’t drop below a certain price. In the US, there are signs of a shift away from semiconductor stocks, which led the market at the start of the year. The proposed $1.5 trillion defense budget marks a significant increase from the $910 billion budget approved for 2025, fueling this change. To capitalize on this rotation, we could combine long positions in defense with short positions in tech, perhaps by buying puts on a semiconductor ETF. We also see ongoing weakness in oil prices, with WTI crude struggling to stay above $70 a barrel, putting pressure on oil companies. This sector’s underperformance is limiting overall gains for indices like the FTSE 100, presenting an opportunity to buy puts on energy sector funds to profit from the low price environment. Create your live VT Markets account and start trading now.

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