Global tensions and strategic alliances are driving massive changes in market dynamics across the world—presenting both opportunities and challenges for investors.
These changes are also bringing on a new defense spending supercycle—a prolonged period of higher military spending driven by geopolitical conflicts, shifting security priorities, and other factors. We expect an increase in European defense spending to be a key driver of this new cycle.
Many nations are focusing on long-term targets, spending targets tied to GDP, rearming, and accelerating procurement of critical systems such as munitions, air defense, and missiles, as well as naval platforms, while also embracing emerging technologies like cybersecurity, drones, and artificial intelligence-enabled systems.
In the Global Defense Sector Landscape, we explore which defense companies have strong competitive advantages, with some driven by intangible assets and high switching costs. We also analyze how these market trends may affect future defense spending globally, with a particular focus on the US and Europe.
Here are some of the takeaways that US investors may be most interested in.
What’s Driving the New Defense Spending Supercycle
Rising geopolitical tensions and security threats are spurring a new supercycle of spending.
Europe is set to drive the new defense supercycle, with Germany leading much of the incremental spending. Berlin’s 2025 defense budget is projected at about $110 billion, making it the world’s fourth-largest spender, behind Russia at roughly $190 billion. Russia’s war against Ukraine and Indo-Pacific conflicts are also two key factors fueling higher defense budgets on a global scale.
European defense budgets are set to grow 6.8% annually from 2024 to 2035, outpacing the US (1.7%), Russia (3.2%), and China (3.1%). Europe’s share of global defense spending is projected to increase from 16% to 22% by 2030, stabilizing through 2035.
Russia’s invasion of Ukraine, as well as pressures from China’s growing military and geopolitical presence, have led countries to form alliances to maintain regional balance and enhance overall security. Finland and Sweden’s entry into NATO expanded the alliance’s presence along Russia’s border. These developments have prompted NATO members to significantly raise their defense budgets. For European states, the risk of a US support pullback and the necessity of greater strategic autonomy have added further urgency to spending commitments.
While inflation erodes economic growth and constrains government spending power, its effect on defense spending is expected to be muted. Real defense spending from 2021 to 2024 is 22% lower than nominal in the US, and 13% lower in Europe. However, the US and Europe are still expected to increase their defense spending.
The urgency created by heightened global tensions and persistent security threats is compelling governments to prioritize defense above other budget categories. US contractors will benefit as Europe addresses capability gaps, particularly in high-tech systems.
US defense procurement is concentrated around four contractors—Lockheed Martin LMT, General Dynamics GD, Northrop Grumman NOC, and RTX RTX).
Those top contractors accounted for 53% of the total available contracts for the fiscal 2024 budget. However, in the long term, there is upside potential for smaller contractors to capture a higher relative share of the budget as the Department of Defense focuses on decreasing the top four contractors’ concentration.
Advisors should speak with clients about opportunities anchored in rearmament and industrial-base expansion, alongside fast-growing niches in cyber, drones, and other emerging technologies.
Investors should also note that defense contractors are exposed to elevated policy and customer-concentration risk. The government is the sole buyer, and export demand depends on national approvals that can shift with politics. Even with multiyear budgets, priorities can change—programs may be rephased or canceled, and NATO spending pledges are not legally binding—leaving companies that rely heavily on a single platform or subsector especially exposed.
Advisors might need to set realistic expectations with clients and inform them of the benefits of favoring more diversified exposure.
Also note that our analysis of the global defense sector is typically published annually. Some companies may report on different schedules, and many defense companies are subject to government regulations that may have longer reporting cycles, especially if they operate in multiple countries with varying disclosure requirements. While the lag in data doesn’t go unnoticed, it does allow for a comprehensive review of sector trends, financial performance, and key developments in the defense landscape.
Supply Chain and Industry Structure
Although the US makes up a significant portion of the top defense contractors by revenue share, changing allocations to defense stocks could affect the geographical diversification of a portfolio. Financial advisors and investors should think about exposures in terms of overall portfolio balance and emphasize the importance of diversification in portfolio strategies.
The defense industry has complex, multitiered supply chains tailored by technology and scope. Prime contractors and suppliers (that is, entities that contract directly with the government) play distinct roles based on specific requirements for defense materials.
Prime contractors oversee the overall design, development, and integration of the final system, working closely with government customers and coordinating lower-tier suppliers. Increasingly, defense programs are getting structured through risk-sharing agreements, where participants share both the costs and risks of developing and producing defense equipment. US defense contractors make up 59% of the top 15 defense contractors by revenue share.
Professional investors should also assess the risks of these risk-sharing partnerships for investment.
Investing Opportunities in the Defense Sector
Land-Based Systems and Artillery
The EU pledged 1.5 million 155 mm shells to Ukraine by end-2024 but fell short. We estimate 2024 European output at 960,000 shells, including 700,000 from Rheinmetall RNMBF, the largest global producer of ammunition and other defense technology.
Moreover, even if a peace deal ended the Russia-Ukraine war immediately, replenishing the more than 2,800 155 mm systems across the US, Canada, and Europe (including Ukraine) would still represent a market opportunity exceeding $55 billion in the US and over $50 billion in Europe, with Rheinmetall set to benefit the most.
Land vehicle demand is surging as Europe and the US replenish fleets. We expect land systems to represent an over $300 billion opportunity for Western countries through the early 2030s, driving orders for General Dynamics, Rheinmetall, and BAE Systems BAE.
Air Platforms and Maintenance
Delays and cost risks in sixth-generation fighter programs have pushed governments to extend and upgrade existing fleets, particularly the F-35. This strategy stretches the platform’s service life into the 2060s, creating a long, predictable tail of high-margin work and expanding the importance of maintenance, repair, and overhaul as stable revenue streams.
In this environment, long-term resilience will be underpinned by stalwarts like Lockheed Martin, with the F-35’s dominant role ensuring continued benefits for the company and its network of subcontractors.
Increased defense budgets are expected to fuel growth in naval defense spending. Submarine modernization and surface fleet expansion will create a $180 billion opportunity in the US and $220 billion in Europe through 2030.
Huntington Ingalls Industries HII, General Dynamics, and the US Navy are negotiating a contract for 17 submarines as the Navy increases its budgeted cost to acquire Virginia-class submarines.
We estimate General Dynamics’ electric boat shipyard and Huntington Ingalls Industries will each receive approximately 33% of the budgeted cost of each Virginia-class submarine as revenue; a cumulative similar share will go to the remaining contractors.
Emerging Niches in the Defense Market
Private Capital and Tech Innovation
The defense tech landscape is heavily concentrated in the US, which leads in innovation and private capital engagement. Europe is scaling quickly, but the rest of the world still lags substantially.
Increased private investments in cybersecurity and drones as dual-use technologies have gained traction. There are opportunities to explore tech startups and prime partnerships in these high-growth niches.
Rare-Earth Materials and Supply Chain Security
The US relies heavily on imported critical materials, creating vulnerabilities in its supply chain, especially given China’s dominance in production. Europe’s supply chain suffers from similar vulnerability because of its reliance on China.
China produces over 60% of global rare-earth minerals and controls over 85% of refining, especially for heavy rare-earth elements, using export controls and licensing as geopolitical leverage, most recently tightening regulations in July 2024. Because of this dependency on critical materials from China, allied collaboration is necessary for creating resilient supply chains.
While the US, Canada, Greenland, and European allies possess ample rare-earth deposits—including heavy rare-earth elements like yttrium, terbium, and dysprosium—the real challenge lies in scaling up refining, securing permits, and competing against China’s low-cost production.
Financial advisors should guide clients toward long-term strategies that consider geopolitical risks and resource dependency.
Takeaways: Moat Ratings and Top Stock Picks in the Global Defense Sector
All 16 of the defense companies in our coverage have moats, with 88% being wide—the highest of any sector.
Wide-moat leaders include:
- Lockheed Martin
- Northrop Grumman
- General Dynamics
- BAE Systems
- Rheinmetall
The top undervalued stock picks with 4-star ratings include:
- Rheinmetall
- Leonardo FINMY
- BAE Systems
- Huntington Ingalls
Advisors should encourage diversified portfolios to include key defense players, emphasizing long-term gains amid rising geopolitical pressures.
