The duration of the conflict remains a central question for investors, and the airstrikes have intensified focus on the defense sector. Earlier this month, President Trump met at the White House with the chief executives of seven leading defense suppliers to discuss munitions production. The president said that the defense firms had "agreed to quadruple" output of what he called "exquisite class weaponry."
The conflict has been part of a broader increase in geopolitical uncertainty that has been spurring defense spending. We see a variety of both near-term developments and structural trends supporting various parts of the sector.
Global munitions supplies have been depleted by a series of conflicts, adding to pressure on governments to rebuild inventories. The action against Iran has been the latest in a series of conflicts that have significantly reduced stockpiles of munitions, including US strikes on Venezuela at the start of 2026, the 2025 US bombing of Iran, and the war between Russia and Ukraine. While inventory depletion itself does not change the production capacity of munitions contractors, a greater willingness by governments to agree on long-term procurement deals would incentivize firms to invest in expanding potential output.
Recent talks between President Donald Trump and leading defense chiefs have supported our view that ensuring adequate ammunition stockpiles has become an increasing focus. In Europe, inventories were already low after decades of underinvestment after the fall of the Iron Curtain and have been depleted by the Russia-Ukraine conflict, which has now entered its fifth year. We believe NATO countries will need to invest for years to replenish stockpiles. Many Asian defense firms are reporting double‑digit growth in order books, based on our latest analysis, with demand from Europe contributing.
Geopolitical uncertainties have been incentivizing nations around the world to increase defense spending. A variety of risks have intensified. The US administration’s new “Donroe Doctrine,” (elaborated on after the ouster of Venezuela’s President Nicolás Maduro in January), strained relations between China and Japan, the US-Israeli military action in Iran, and fractures within the NATO alliance over the future of Greenland and Ukraine all point to a more volatile world, with geopolitical blocs seeking greater strategic autonomy. This has been reflected in proposed defense spending increases in much of the world.
In the US, President Trump’s call for a roughly 50% increase in the US defense budget for fiscal year 2027 marks a dramatic policy pivot. Previously, concerns about fiscal discipline and political gridlock made the US budget a risk factor for the sector. Now, the prospect of a substantial increase is a major catalyst, fundamentally altering investor sentiment. Even if the final figure is lower, the likelihood of year-over-year growth is enough to refocus US defense firms on domestic contracts, thereby reducing competition for European suppliers and creating new opportunities for European companies to benefit from US growth.
Asia Pacific (APAC) is projected to account for nearly one quarter of global defense expenditure in 2025, with regional military spending rising 5.1% year on year in real terms to USD 632bn. China—the world’s second-largest defense spender—represents close to half of Asia’s total outlays and has set a 7% year-on-year increase in its 2025 defense budget. While that would be the slowest pace since 2021, it has been reported that this does not fully capture spending on paramilitary and maritime forces. China has also invested heavily in emerging technologies, such as AI to enhance decision-making.
Defense self-reliance has also become a political issue in India, spurring efforts to increase domestic manufacturing and reduce import dependence. Since our latest analysis of the global industry outlook "Defense: CIO's views and investment implications" on 2 February, Japan's prime minister, Sanae Takaichi, won a supermajority in parliamentary elections, providing her with a strong mandate for her agenda, which includes boosting the defense budget and bolstering the domestic defense industry.
The drive for increased autonomy is especially powerful in Europe, as strains in relations with the US have eroded confidence in the security guarantees provided by the NATO treaty. Disagreements with the US over how to end the war between Russia and Ukraine have contributed to a greater willingness in Europe to invest in an independent defense capability. In June 2025, NATO agreed to raise defense spending targets to 5% of GDP by 2035 (3.5% for core defense, 1.5% for defense and security-related expenditures). Based on NATO estimates, European NATO countries and Canada are expected to have spent a combined USD 559 billion in 2025 (+16.0% y/y), while the US alone is projected to have spent an additional USD 845 billion (+2.7% y/y). These figures are based on 2021 prices and exchange rates (NATO as of 3 June 2025). The German Bundestag’s approval of a EUR 52 billion military expenditure package in December 2025, covering 29 contracts across a broad array of weapons and services, underscores the seriousness of this commitment.
This impulse was underlined again by the Munich Security Conference in February. German Chancellor Friedrich Merz admitted that "a deep divide has opened between Europe and the United States" and that Europeans must be ready to make "sacrifice" to guarantee their freedom. Meanwhile, French President Emmanuel Macron said "Europe has to learn to become a geopolitical power. It was not part of our DNA."
Investing in novel defense technologies has become an increasing priority for nations. In our view, innovation is at the forefront of the sector’s transformation. Increased spending is driving demand for advanced weapon systems, munitions, armored vehicles, missiles, radars, aircraft, drones, and warships. As digital and space domains become more contested, cybersecurity and space technology providers are growing in relevance. The civilian security sector is also seeing major beneficiaries in cybersecurity software vendors and managed security service providers, reflecting the importance of digital resilience.
So, while attention is focused on the fast-moving developments in the Middle East, we see a longer-term global push to boost or rebuild defense capabilities—with a focus on developing autonomy and resilient supply chains. We are constructive on European defense, favoring a selective approach focused on diversified suppliers. European firms with significant US sales or ambitions to expand in the US market are particularly well positioned, in our view, as are those with strong exposure to German and broader European government contracts.
Asian firms are rapidly emerging as global exporters, with strengths in artillery, missile-defense, aerospace, electronics, and next-generation technologies like counter-drone and space-based systems. For example, South Korean companies have emerged as Asia’s leading suppliers of armaments to European nations increasingly seeking to diversify procurement beyond NATO suppliers. Their competitive positioning spans artillery, missile defense, aerospace solutions and aircraft, complemented by broader industrial capabilities. Their ability to provide timely delivery, competitive pricing, and high-quality systems has materially shifted defense procurement dynamics to their favor.
Our outlook is more nuanced for large traditional US defense companies (known as primes), given their reliance on a single customer—the US government. This makes them vulnerable to annual budget negotiations, regulation, and policy shifts. Many have struggled with legacy fixed-price contracts, which ran into post-pandemic cost inflation. While we have a Neutral stance on US defense overall, we prioritize diversified missiles and munitions manufacturers, subcomponent suppliers, and companies with commercial aerospace exposure over pure-play defense primes.
This piece is based on research by Alexander Stiehler, Nathaniel Gabriel, and Kayden Lee. Read more in our publication " Defense: CIO's views and investment implications " by Kiran Ganesh, Nathaniel Gabriel, Kayden Lee, Mircea Tanasie, and Matthew Carter.
