What NATO’s Spending Increase Could
Mean for Defense Stocks

At the 2025 NATO Summit in June, member nations committed to spending 5% of GDP on defense by 2035. This was a pivotal moment for the transatlantic alliance, as 5% of GDP represents a quantum leap from the previous benchmark of 2% of GDP. The new spending target is to be segmented, with at least 3.5% of GDP going towards “core defense requirements” and the remaining 1.5% going to broader defense and security-related investments. Here’s a look at some areas of defense that could potentially benefit.

Ammunition Manufacturers

The 3.5% of GDP portion of NATO's new defense spending commitment is specifically aimed at helping member nations acquire and maintain the military assets and capabilities that NATO believes is necessary for collective security. The goal here is to replenish stockpiles – which have been drawn down as countries have provided support to Ukraine – and ensure that allies are adequately prepared for any future conflict. Given this focus, ammunition manufacturers appear well positioned. From small arms rounds to artillery shells and missiles, orders should increase as nations move to bolster their strategic reserves and maintain high levels of military readiness.

One company that could potentially reap the benefits here is Rheinmetall (4.67%*). A prominent European defense contractor, it offers a vast range of munitions products, from small arms ammunition for infantry to large caliber shells for tanks and artillery, and even advanced missile systems. A second company that looks well positioned to benefit from an increase in ammunition spending is BAE Systems (4.05%*). A multinational defense company, it offers a range of NATO-compliant ammunition products and is actively investing in its munitions production capabilities across its global footprint to meet growing demand from customers.

Missile and Drone Defense Companies

Missile and drone defense could also see an uptick in spending as NATO countries allocate more of their GDP to core defense products. Today, it’s vital that countries have the ability to detect, track, and intercept incoming aerial threats so that they can protect their populations and critical infrastructure.

One of the biggest players in this area of the defense industry is RTX Corp (7.18%*). Via its Raytheon segment, it produces a vast range of missile and drone defense products including the Patriot system, the David’s Sling system, and the short-range Iron Dome Weapon System. Another major player in missile defense is Lockheed Martin (5.62%*). The world's largest defense contractor, it offers a range of related solutions including the Terminal High Altitude Area Defense (THAAD) system, the C2BMC (Command, Control, Battle Management, and Communications) system, and the PAC-3 Missile Segment Enhancement (MSE).

Cybersecurity Specialists

Looking beyond core defense to the broader defense realm, one area that could see increased spending in the years ahead is cybersecurity. Today, the cyber world is a critical battleground, with nations facing constant threats from bad actors. Note that after the US got involved in the conflict in the Middle East in June, several US government agencies warned that critical infrastructure operators should be on high alert for cyberattacks. This shows that the geopolitical backdrop and the cybersecurity landscape are heavily intertwined, with real-world conflicts directly escalating cyber risks.

Increased investment in this domain would most likely focus on strengthening national cyber defenses and protecting critical infrastructure from digital attacks. And it could benefit a range of companies within the cybersecurity domain. One firm that could potentially enjoy higher demand for its solutions is General Dynamics (3.42%*) which provides cybersecurity services through its General Dynamics Information Technology (GDIT) business unit. GDIT's primary clients are federal agencies such as the Department of Defense (DoD), US Army, US Air Force, and the Department of Homeland Security (DHS). Another cybersecurity company that could benefit is Palo Alto Networks. Known for its advanced firewalls and cloud-based security features, it has become a major player in the enterprise and government cybersecurity space.

* % weighting in the Themes Transatlantic Defense ETF, as of July 2, 2025

Demand Across the Industry

The NATO alliance's unprecedented commitment to invest 5% of GDP in defense by 2035 marks a profound shift in global security priorities. As discussed above, this substantial increase is likely to generate demand across various areas of the defense industry, from ammunition to advanced missile defense systems and the crucial realm of cybersecurity. Given that this new spending target is likely to result in money going towards many different areas of defense, taking a diversified investment approach to the industry could be sensible. By allocating capital across a range of defense stocks, investors can potentially position their portfolios to capitalize on the defense spending theme while simultaneously mitigating risks associated with individual companies.