In the tapestry of global financial trends, the spotlight has increasingly been cast on defence sector equities throughout the first half of 2025. This emergent trend tracks back to the escalating geopolitical tensions that have darkened the international stage over the past four years. Among these conflicts, Russia’s military actions against Ukraine and Israel’s engagement in a dual-front confrontation with Gaza and Iran stand out. Compounding these concerns are the murky intentions of China regarding Taiwan, raising alarms about what this might signify for the United States and the broader international community.
The backdrop to this changing economic landscape includes not only these varied military engagements but also a remarkable surge in global defence expenditures. The Stockholm International Peace Research Institute (SIPRI) reports that worldwide military spending ascended to an unprecedented $2.4 trillion in the year 2024 alone. By the following year, European nations ramped up their defence budgets at a rate unseen since the 1950s. This unparalleled increase substantiates the rising investor confidence in defence stocks today, presenting a bullish stance that seems to only strengthen over time.
The vanguard of this expenditure thrust remains the United States. For the fiscal year (FY) 2025, the U.S. Department of Defense budget is set to expand by approximately 4%, reaching a monumental $849 billion. Yet, when factoring in additional spending initiatives and projected increment for FY2026, defence funding in the U.S. could very well soar to near $1 trillion annually. These are not fleeting financial commitments. They are multi-year pledges allocating substantial funds towards the modernisation of the defence industry. This modernisation encompasses a spectrum from space exploration to cybersecurity enhancements, and the burgeoning field of unmanned systems.
Within this financial ferment, investors are navigating diverse strategies. Some are veering towards undervalued stocks with potential for significant returns, whilst others, more risk-averse, opt for stalwart large-cap defence and aerospace equities, seeking both growth and income opportunities.
Considering specific companies, Lockheed Martin Corp stands as a colossus in the defence sector, not merely by virtue of its size but also due to its comprehensive engagement across a myriad of defence capabilities. Despite facing headwinds this year, including a $2 billion loss in classified programs and delays in its flagship F-35 fighter jet program, Lockheed Martin’s prospects remain bright. The company has entrenched itself deeply into missile defence systems, space exploration, and hypersonic weaponry, alongside substantial investments in AI-driven mission systems and satellite networks. This positions Lockheed Martin at the forefront of defence technology evolution. Even with a temporary dip in its stock value, the company’s forward earnings ratio suggests a value buy, with analyst projections indicating substantial earnings growth and a promising upward trajectory for its stock price.
General Dynamics Corporation, with its diversified offerings spanning combat vehicles, nuclear submarines, and IT and cybersecurity services, has consistently demonstrated its versatility across the defence sector. Notable contract wins, including a $1.85 billion modification for Virginia-class submarines and a significant commitment from the U.S. Department of Defense for the Abrams tank program, underscore the company’s integral role in the U.S. military’s modernisation efforts. Despite trading slightly above consensus targets, General Dynamics maintains its appeal with projected earnings growth and an expanding margin, particularly within its aerospace division.
L3Harris Technologies Inc presents another intriguing prospect with a commendable performance in 2025, escalating over 19% in stock value. Despite potential for a market correction, the company’s stock holds promise. The anticipated U.S. military investment in a so-called “Golden Dome” defence system, although not yet earmarked in any spending bill, could significantly benefit L3Harris, given its expertise in secure communications, sensor fusion, and electronic warfare—all critical components of such a defence initiative. With analysts cautiously optimistic about continued growth, and recent adjustments in price targets, L3Harris Technologies appears well-poised for further ascension in the defence sector landscape.
In sum, as defence budgets balloon and geopolitical tensions simmer, the defence sector offers a potent mix of challenges and opportunities. Companies such as Lockheed Martin, General Dynamics, and L3Harris Technologies are at the vanguard of an evolving industry that is critical not only to national security but also to investors seeking robust and resilient opportunities in an ever-volatile global market.
