Hey there, bargain hunter. Most of the market is chasing AI infrastructure and semiconductor names. Meanwhile, a different kind of arms race is printing the most consistent multi-year growth story in the entire market – and it has signed government budgets behind it, not just earnings call optimism.
Global military expenditure reached $2.89 trillion in 2025. That is the 11th consecutive year of rising global defense spending. As a share of GDP, it climbed to 2.5% – the highest level since 2009. Europe’s piece of that surge grew 14%, to $864 billion. Germany’s defense budget alone grew 24% year-over-year, crossing the 2% NATO threshold for the first time since 1990.
The Structural Shift Nobody Talked About
In 2014, only three NATO allies met the 2% of GDP defense commitment. In 2025, all 32 met it for the first time. NATO has now committed to a new target of 5% of GDP by 2035 – a two-and-a-half times increase from the old benchmark. Goldman Sachs has flagged the EU’s ReArm Europe plan adding more than €800 billion in defense spend. That’s not a one-quarter catalyst. That’s a decade-long procurement cycle just getting started.
The spending is flowing into munitions replenishment, air defense systems, drones, counter-drone technology, and next-generation platforms. The U.S. Congress has also approved defense spending rising to over $1 trillion for 2026, with proposals on the table to push it toward $1.5 trillion by 2027.
Where the Money Is Going
There are two distinct tracks here, and the smart money is already separating them.
Track one – the traditional primes: Lockheed Martin (LMT), RTX, Northrop Grumman (NOC), and General Dynamics (GD). These are the companies with multi-decade platform contracts, the cleared facilities, and the production capacity to absorb the surge. The iShares U.S. Aerospace & Defense ETF (ITA) returned nearly 57% over the past year and is up roughly 10% year-to-date. GE Aerospace, RTX, and Boeing account for nearly half the fund.
Track two – the layer that barely existed five years ago: drones, counter-drone systems, AI targeting, satellite intelligence, surveillance, and cyber. The Global X Defense Tech ETF (SHLD) has grown to $8.6 billion in assets since launching in 2023, is up nearly 49% over the past year, and captures both the European rearmament wave and the technology transformation of modern warfare.
- Global defense spending 2025: $2.89T (+2.9% real; 11th consecutive annual rise)
- European NATO member spending: $559B in 2025 (+14% YoY)
- Germany defense budget: $114B (+24% YoY)
- NATO 2035 target: 5% of GDP (vs. old 2% benchmark)
- ITA 1-year return: ~57% | SHLD 1-year return: ~49%
- U.S. defense budget for 2026: over $1 trillion approved
The Part People Skip
This isn’t a trade on geopolitical fear. It’s a trade on signed budget commitments in Berlin, Warsaw, London, and Tokyo. Government procurement cycles are slow to start and very slow to stop. The defense companies with the backlogs – and the order books that now stretch years into the future – are not priced at bubble multiples. RTX, Northrop, and Lockheed are all trading at forward P/E ratios well below what pure AI-adjacent names command.
The risk worth watching is execution. Production capacity constraints are real – several defense primes have flagged labor shortages and supply chain bottlenecks as the bottleneck, not demand. Boeing’s ongoing quality issues drag on ITA specifically. And if geopolitical tensions de-escalate faster than expected, procurement timelines could slip.
But here’s where I’m at: it took a decade for NATO allies to go from three meeting the 2% target to all 32 meeting it. The next phase – from 2% to 5% – has signed political commitments and a threat environment that isn’t getting quieter. The spending is coming. The question is just which vehicles you’re using to sit in its path.
Full breakdown here – because the defense trade in 2026 is not a single ticker, it’s a multi-year allocation decision.
