📍 Barron’s, June 26, 2025

The U.S. is at the center of a massive global shift in the defense industry—driven in part by the AI arms race—that makes a compelling case for long-term investment in defense and aerospace stocks.

This conclusion comes from a new outlook by BlackRock’s Investment Institute, led by Jean Boivin, which identifies “mega forces” behind long-term investment trends.

According to the report:

• U.S. pressure on NATO allies to increase military spending ahead of the 2025 NATO summit in the Netherlands is expected to be a major tailwind for defense stocks.
• Military spending in Europe has reached 2% of GDP after decades of underinvestment and is expected to rise further.
• Many NATO members are likely to commit to spending 5% of GDP—3.5% for defense, and 1.5% for defense infrastructure.

📈 Market Impact:

• S&P 500 aerospace and defense stocks have surged 33% since early April 2025, far outperforming the index’s 21% gain.
• Yet valuations remain attractive—stocks like Lockheed Martin, General Dynamics, Northrop Grumman, and Textron are trading at lower forward P/E ratios than the broader S&P 500.

🔍 Industry Outlook:

• As NATO members renew spending commitments and rely more on U.S. defense firms, growth opportunities are expanding.
• “Defense will emerge as a dynamic growth industry,” says Stifel analyst Jonathan Siegmann. “The no-growth era of the defense industrial base is over.”

📊 Global Trends:

• According to SIPRI, global military spending reached $2.7 trillion in 2024—up 9.4% YoY, the largest increase since the Cold War.
• For comparison, global AI spending is projected to reach $630 billion by 2028 (IDC).

🛩 U.S. Leadership in Defense Tech:

• A Republican Senate spending bill could raise Pentagon funding by $113 billion in 2026, surpassing $1 trillion in discretionary military spending.
• Drone technology could receive $25 billion in funding, potentially rising to $50 billion by 2035.
• The U.S. remains the largest and most dominant drone manufacturer.

✅ Top Picks Mentioned:

• Textron, Honeywell, and L3Harris—all key drone systems suppliers with strong cash flow and commercial diversification.

🧠 AI + Geopolitics = Investment Opportunity

BlackRock concludes:
“Geopolitical fragmentation and strategic AI competition are reinforcing global focus on national security—creating investment opportunities in defense. But both mega forces require a selective approach.”