European spending surge reshapes global defense landscape
European NATO members collectively increased their defense budgets by an estimated 12% in real terms in 2025, the largest single-year jump in decades. Countries such as Poland, Germany, and the United Kingdom led the charge, with Poland now allocating over 4% of its GDP to defense—the highest ratio in the alliance. Germany, which announced a historic €100 billion special fund for its Bundeswehr in 2022, has continued to ramp up procurement, including orders for F-35 fighter jets, new submarines, and advanced missile defense systems. The European rearmament push has been a boon for major defense contractors, with Lockheed Martin ($LMT), Northrop Grumman ($NOC), and RTX ($RTX) all reporting robust order backlogs from European clients. European defense giant Airbus SE ($EADSY) has also seen a surge in demand for its Eurofighter Typhoon and A400M transport aircraft.
The SIPRI report highlights that European spending now accounts for roughly 28% of global military expenditure, up from 24% in 2021. This shift is partly a response to the perceived unreliability of U.S. security guarantees, especially amid political uncertainty in Washington. The U.S. defense budget, while still the world’s largest at approximately $820 billion, fell by 1.5% in real terms in 2025, reflecting delayed appropriations and supply chain bottlenecks. However, the decline is expected to be temporary, as the Biden administration has proposed a $895 billion defense budget for fiscal year 2026, pending congressional approval.
U.S. pullback and global implications
The modest U.S. reduction in spending has not dampened overall global growth, as Asia and the Middle East also posted significant increases. China, the world’s second-largest military spender, raised its budget by 6.8% to an estimated $310 billion, while India increased outlays by 9.5% to $85 billion. In the Middle East, Saudi Arabia and Israel both boosted defense spending, with Israel’s budget rising sharply due to ongoing conflicts in Gaza and with Hezbollah. The global total of $2.89 trillion represents approximately 2.5% of world GDP, the highest share since the Cold War era.
For investors, the sustained rise in military spending presents opportunities across the defense sector. General Dynamics ($GD), a key supplier of armored vehicles and naval ships, has seen its stock rise 18% year-to-date, while Lockheed Martin ($LMT) has gained 12%. Analysts at major investment banks have upgraded their outlooks for the sector, citing multi-year procurement cycles and the likelihood of further increases in NATO members’ budgets. However, risks remain, including potential export controls, geopolitical tensions that could disrupt supply chains, and the possibility of a shift in U.S. policy under a future administration.
Defense stocks rally as order books swell
The defense sector’s performance has been a standout in an otherwise mixed market. Northrop Grumman ($NOC) reported a 15% increase in backlog to $85 billion in its latest quarterly earnings, driven by demand for its B-21 Raider bomber and advanced missile systems. RTX ($RTX), formerly Raytheon Technologies, has benefited from strong sales of its Patriot air defense systems, which are being deployed across Europe and the Middle East. European defense stocks have also rallied, with BAE Systems and Rheinmetall hitting all-time highs. The trend is expected to continue as governments commit to long-term modernization programs, including investments in cyber warfare, drones, and space-based surveillance systems.
Despite the record spending, critics argue that the focus on conventional military buildup diverts resources from pressing global challenges such as climate change and pandemic preparedness. The SIPRI report notes that global military expenditure now exceeds the combined GDP of all but the world’s 10 largest economies. As tensions persist in Eastern Europe, the South China Sea, and the Middle East, the trajectory of defense spending appears set to remain elevated for the foreseeable future, with profound implications for global security, fiscal policy, and financial markets.
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