Defence Profits Boost: UK Firms Surge on Spending 2026

Defence profits are soaring for UK firms as governments worldwide increase military budgets, with Rolls-Royce and BAE Systems lifting their earnings guidance on Thursday. This surge reflects a broader trend of heightened defence spending following geopolitical tensions, offering significant opportunities for investors.

Rolls-Royce Raises Profit Forecast

Rolls-Royce, known for jet engines, ship turbines, and small nuclear plants, now expects underlying operating profit of £4.7bn-£4.9bn this year, up from £4bn-£4.2bn. Free cash flow forecast also increased to £3.8bn-£4bn, driven by defence contracts and demand from AI datacentres for power generation.

The company benefits from the post-pandemic recovery in long-haul flights, boosting its civilian engine business. Additionally, recent Nato commitments, including the Saab GlobalEye and MQ-4C Triton systems, both using Rolls-Royce engines, provide long-term visibility.

BAE Systems Also Benefits

BAE Systems, a major defence contractor, similarly raised its guidance, citing government pledges to enhance defence capabilities. The UK's defence investment plan, confirming Tempest fighter jet funding until 2030 and adding £5bn for autonomous weapons, underpins future growth.

Impact of Geopolitical Tensions

Since Russia's invasion of Ukraine, defence spending has jumped across Europe and beyond. This has translated into record orders for UK defence firms, with governments prioritising military modernisation and autonomous systems.

Key Takeaways for Investors

• Defence spending is a growth driver for UK firms, with multi-year contracts.
• Rolls-Royce's diversification into AI datacentre power adds upside.
• Autonomous weapons and drone technology present new revenue streams.
• Government commitments provide stable cash flow and earnings visibility.

Future Outlook

CEO Tufan Erginbilgiç highlighted the company's transformation, with a focus on calibrating the US datacentre gas turbine market. The defence sector's order book remains robust, with loyal wingman drones and surveillance systems in development.

As governments continue to prioritise security, UK defence firms are well-positioned for sustained profitability. Investors should watch for further guidance updates and contract announcements.

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