Defense Stocks: A Strategic Play Amid Macro Uncertainty

thoughts from themes

Defense Stocks: A Strategic Play Amid Macro Uncertainty

Date: May 23, 2025

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Investors face a complex landscape right now. With trade deals yet to be finalized, economic growth slowing, and America’s debt crisis back in the spotlight, there’s a lot of uncertainty. Against this backdrop, one area of the market that stands out – and is outperforming in 2025 – is defense stocks.With countries the world over looking to enhance national security, this sector appears to have durable, long-term growth trajectory and it’s insulated from broader macroeconomic concerns.

A Long-Term Secular Theme

In recent years, global defense expenditures have increased significantly. Last year, worldwide spending on defense reached a record high of $2.7 trillion – a 9.4% increase from the level of spending in 2023¹. This marked the steepest year-on-year rise since the end of the Cold War and it came after a substantial year-on-year jump the previous year. Drivers of the increase in spending included conflict in Ukraine and the Middle East, escalating geopolitical tension in other areas of the world, a renewed focus on national security, and widespread commitments to modernizing military capabilities.

Looking ahead, global defense expenditures are projected to continue rising, driven by increased spending in Europe. Given concerns about US President Donald Trump’s unwillingness to defend NATO allies, European countries are about to unleash a flood of money into their defense industries, reversing decades of underinvestment. The European Commission got the ball rolling in March when it announced a five-part plan to mobilize up to €800 billion in new defense spending over the next four years. Known as “ReArm Europe,” this plan allows EU member states to increase their defense spending by up to 1.5% of GDP annually without immediately falling afoul of the EU’s normal deficit rules².

Greece’s New $25 Billion Defense Strategy

Since the ReArm Europe package was announced in March, a number of European countries have taken steps to increase their national defense budgets and enhance their military capabilities.

In April, Greece announced that it will spend €25 billion on defense as part of a 12-year strategy³. This strategy will be based on two fundamental pillars – the integration of advanced defense technologies and the active participation of the Greek defense industry in all arms programs. The arms procurement will include drones and other unmanned vehicles, a communications satellite, and a five-level defense system (known as the “Achilles’ Shield”) encompassing anti-tactical ballistic, anti-air, anti-ship, anti-submarine, and anti-drone measures. Greece’s goal is to modernize its armed forces so they are fit for the digital age, and keep pace with the defense advances of its neighbor and historical rival, Turkey.

Germany’s Ambitious Defense Plans

In May⁴, Germany’s Foreign Minister Johann Wadephul suggested that the country could increase its defense spending to 5% of GDP in the near future, in line with US President Donald Trump’s demands. Speaking at a meeting of NATO foreign ministers in Turkey, Wadephul said that Germany would support NATO’s proposal to spend 3.5% of its GDP on traditional military expenses and an additional 1.5% on defense-related infrastructure. Note that in 2024, Germany’s regular defense spending amounted to around $90 billion⁵ – roughly 1.9% of GDP. An increase to 5% of GDP would mean another $150 billion or so being spent on defense.

Spain Is Upping Its Defense Spending

In 2024, Spain spent just 1.3% of GDP on defense – the lowest among NATO members⁶. However, in April, Prime Minister Pedro Sanchez said that it will meet NATO’s target of spending 2% of GDP this year (much earlier than its previous self-imposed deadline of 2029). Further increases are expected from the country in the near future. In May, European defense commissioner Andrius Kubilius said that Spain will need to target 3% of GDP to head off the threat of Russian aggression in Europe, adding it would be the government’s task “to find a way” to increase defense spending significantly.

UK Defense Spending is Rising

While no longer a European Union (EU) member, Britain is upping its defense budgets too. This year, it plans to spend 2.5% of GDP on defense, up from 2.3% in 2024⁷. In May, the UK and the EU agreed on a new security and defense partnership that could pave the way for British defense companies to participate in European defense initiatives. This could benefit UK companies that specialize in defense solutions such as BAE Systems, Rolls-Royce Holdings, and Babcock International.

The 2025 NATO Summit

Investors can expect to hear more news in relation to NATO defense budgets in the coming months. In late June, a NATO summit will take place at the World Forum in The Hague, Netherlands. This is expected to be a pivotal moment for future defense budgets. While 2% of GDP has been the benchmark in recent years, there’s growing pressure to raise this to a significantly higher level to meet current security challenges. US Secretary of State Marco Rubio has said that all NATO nations “will have agreed on a goal” of reaching 5% of GDP (Donald Trump’s suggested target) in defense spending over the next decade by the time the summit is over⁸. If 5% was the goal among NATO countries, it would provide a very supportive backdrop for the world’s defense companies.

Investing in Defense Stocks

Put all this together and the setup for defense stocks looks interesting right now. In the years ahead, defense companies across Europe and the US may potentially be able to generate sustained revenue growth, driven by the significant rearmament initiatives underway in NATO countries. Add in the fact that the defense sector is largely insulated from broader macroeconomic downturns, and the landscape for investors looks appealing. In the current environment, defense stocks could offer a compelling opportunity for those seeking resilience and growth amid persistent global instability.

Footnotes:

¹France24, Global military spending hits record $2.7 trillion in 2024, sharpest rise since Cold War, as of April 28, 2025

²EU Defense Industry, Introducing the White Paper for European Defence and the ReArm Europe Plan- Readiness 2030, as of March 12, 2025

³Politico, Greece announces ‘drastic’ €25B transformation of defense strategy, as of April 2, 2025

⁴CNBC, Germany backs Trump’s push for 5% NATO defense spending target, as of May 15, 2025

⁵Sipri Fact Sheet, Trends in world military expenditure, 2024, as of April 2025

⁶Politico, Spain unveils plan to meet NATO’s defense spending target this year, as of April 22, 2025

⁷Fox Business, UK chancellor touts defense spending push, outlines US trade talks, as of April 28, 2025

⁸Reuters, Rubio says NATO members will agree to 5% defense spending over next decade by June summit, as of May 16, 2025

thoughts from themes

thoughts from themes