Defense spending is surging. These under-the-radar stocks offer exposure, Bank of America says

Global defense spending surged to $2.7 trillion, a 9.4% year-over-year increase marking the steepest rise since the Cold War, driven by escalating geopolitical tensions and a focus on advanced technologies like cyber defense and autonomous systems. Bank of America identifies this trend as a significant investment opportunity, highlighting companies such as Parsons and General Dynamics as well-positioned to capitalize on increased spending across traditional defense and dual-use innovations due to their exposure to security, technology, and infrastructure themes.

Analysis

Global defense spending is undergoing its most significant expansion since the Cold War, reaching $2.7 trillion in 2024, a 9.4% year-over-year increase equivalent to 2.5% of global GDP. This surge is propelled by escalating geopolitical tensions and a strategic shift toward national self-sufficiency, with substantial new government investment programs like the EU's 800 billion euro plan and a $150 billion U.S. allocation for missile defense. The spending is notably directed toward advanced and dual-use technologies, including cybersecurity, satellite systems, and AI, in addition to traditional armaments. Within this environment, Bank of America has identified specific companies poised to benefit, highlighting Parsons (PSN) and General Dynamics (GD). Parsons has seen its stock jump 40% in six months, driven by its focus on cyber and space solutions and key contract wins, including with the National Nuclear Security Administration. Similarly, General Dynamics' stock has climbed over 29% in the same period, more than doubling the S&P 500's gain, on the strength of its core naval shipbuilding and aerospace divisions. While the overall trend is robust, the report cautions that a 'drone bubble' may be forming, signaling potential froth in certain sub-sectors.

Key Decisions for Investors

• Investors should consider increasing exposure to the defense and aerospace sector to capitalize on the secular growth in global military expenditures driven by geopolitical and technological imperatives.
• Evaluate long positions in well-positioned contractors like Parsons (PSN) and General Dynamics (GD), which have demonstrated strong recent performance and are aligned with high-growth segments such as cybersecurity, missile defense, and naval modernization.
• While the sector outlook is positive, it is prudent to monitor for overvaluation in specific sub-sectors, such as drone technology, where Bank of America has noted the potential formation of a bubble.