Geopolitical tensions and defense spending

Geopolitical tensions and defense spending have driven a shift in energy and defense sectors in the first half of 2026. Supply disruptions in the Middle East have transformed a looming oil supply glut into a severe shortage, benefiting U.S. energy companies like ExxonMobil and Chevron. Meanwhile, NATO tensions have escalated, with the U.S. considering expanding its nuclear weapons-hosting capability and reviewing its military presence in Europe. President Trump has renewed threats to remove U.S. troops from Europe if allies do not meet defense spending targets.

These geopolitical dynamics have significant market implications. Midstream energy companies have seen a strong first half due to increased oil prices and demand. Defense stocks, such as Lockheed Martin and Raytheon Technologies, may benefit from potential increased spending and investment in Europe's defense industry. However, Europe's ability to deliver usable military capability with its surging budgets remains a key question for investors.

Two key catalysts to watch in the coming months are the outcome of the U.S. military review in Europe, expected to be completed by the end of 2026, and the U.S. House of Representatives' vote on the National Defense Authorization Act, which includes provisions to expand defense technology cooperation with Israel. These events will provide further clarity on the direction of U.S. and European defense spending and policy.