Defense Sector on the Radar

Geopolitical fragmentation is making defense spending a structural equity theme that remains underrepresented in portfolios.

• Global defense spending reached $2.7 trillion in 2024, up 9.4% in real terms from 2023, the steepest annual increase since at least the end of the Cold War; more than 100 countries increased military spending.
• US defense spending represents about 3.7% of GDP and is expected to reach 5% by 2035, while AI-related construction investment is below 1% of GDP but has doubled since 2018.
• BlackRock’s proprietary text analytics show investor attention to AI has risen by about 150%, compared with roughly 35% for defense, suggesting that defense spending is not yet fully reflected in market attention.
• The S&P 500 provides only 4% exposure to defense beneficiaries, versus 30% exposure to the AI theme, indicating potential underinvestment in defense.
• BlackRock defines defense-spending beneficiaries as an 80% MSCI World Aerospace and Defense Index and 20% NYSE FactSet Global Cyber Security Net Index blend, whose active returns have historically shown positive correlations with the VIX and gold during periods of geopolitical uncertainty.

Takeaway: Investors should consider a selective, active allocation across the full defense ecosystem because long-term government contracts may provide diversification and resilience, although the authors’ forecasts and the expected outperformance of global equities are not guaranteed.