Josh Hammer: What exactly is the purpose of NATO in the year 2026?

U.S. taxpayers are said to fund roughly 60% of NATO defense spending; the author argues NATO has outlived its Cold War purpose and accuses many European members of free-riding and obstructing U.S. operations during Operation Epic Fury against Iran. The piece calls for rethinking alliances toward focused bilateral/trilateral pacts, implying potential shifts in defense procurement, geopolitical risk allocation and market exposure to defense and regional risk premiums.

Analysis

The current political pressure to reconfigure multilateral alliances creates a multi-year procurement and logistics reallocation wave rather than a single event. Expect a 12–36 month acceleration in bilateral Foreign Military Sales and bespoke logistics contracts (airlift/tanker/ISR) as states prefer smaller, tightly controlled programs; that favors large U.S. primes with captive export channels and integrated sustainment businesses. Incremental defense budgets in a high-procurement regime typically translate to a 10–20% revenue tailwind for prime systems suppliers over two fiscal years, with outsized margin capture by firms owning long-term spares and aftermarket services.

Second-order winners include domestic specialty manufacturers (munitions, EW, secure comms) and the raw-materials and tooling ecosystem that supports rapid surge production — expect procurement managers to prioritize onshore suppliers and dual-source certification, boosting names exposed to U.S. supply-chain reshoring. Conversely, multinational collaborative programs with complex cross-border supply chains face schedule risk: delays in joint programs (fighter jets, multi-year naval builds) will shift near-term award share to U.S.-centric suppliers and subcontractors.

Tail risks are geopolitical de-escalation or a fiscal pushback at the U.S. congressional level; both could unwind 6–18 months of repricing. A faster-than-expected diplomatic compromise or a domestic budget impasse would rapidly reprice defense contractors back toward secular growth rates, while protracted regional conflict would extend upside and tighten input costs (steel, specialty alloys), pressuring margins absent contract repricing.

Key Decisions for Investors

• Long Lockheed Martin (LMT) — buy 9–15 month in-the-money calls or 12–18 month LEAPs. Rationale: dominant position in FMS-capable platforms and captive sustainment; reward: asymmetric upside if bilateral sales accelerate; risk: ~15–25% drawdown on rapid de-escalation or budget cuts. Size initial tranche 3–5% of thematic allocation and scale on pullbacks.
• Long Raytheon Technologies (RTX) vs Short BAE Systems (BAES.L) — pair trade horizon 6–24 months. Rationale: RTX exposed to missile, radar, and secure-comm exports to U.S. partners; BAES more exposed to European intra-alliance friction and FX/defense procurement delays. Target 1:0.6 notional, stop-loss at 8% portfolio move against the pair.
• Long mid-cap munitions / tactical systems (Vista Outdoor VSTO or MP Materials MP for supply-chain leverage) — buy shares with 12–24 month view. Rationale: onshore munitions and critical-material supply benefit from reshoring and surge orders; risk: demand concentration and commodity cyclicality. Take profits incrementally on 25–40% moves.
• Options hedge: buy protective put collar on a basket of defense longs (LMT/RTX/GD) with 9–12 month expiries to cap downside to ~12–15% while funding upside with short OTM calls. Use this if political volatility spikes nearer-term (0–3 months).