Global military spending rises 2.9% despite US decline over Ukraine freeze

Global military spending rose 2.9% to $2.89 trillion in 2025, the 11th straight annual increase, lifting spending to 2.5% of global GDP, the highest since 2009. Europe drove the increase with a 14% jump to $864 billion, while U.S. spending fell 7.5% to $954 billion after no new financial military aid to Ukraine was approved. SIPRI said the U.S. decline is likely temporary, with 2026 congressional spending already above $1 trillion and potentially rising to $1.5 trillion in 2027.

Analysis

The bigger signal is not the absolute level of defense spending, but the reallocation of marginal dollars away from the U.S. toward Europe. That typically favors prime contractors with deep NATO exposure, higher munition mix, and shorter-cycle backlog conversion, while hurting names that were relying on U.S. aid-driven transfer payments rather than organic procurement. The second-order winner set is broader than pure defense: air defense, artillery, drones, electronic warfare, hardened communications, and base infrastructure should see more durable order flow than legacy platform builders.

This is still an early-cycle trade rather than a one-day macro event. European budget increases are sticky because they are being driven by multi-year force-planning, not a single conflict headline, so the revenue impulse should persist 12-36 months even if ceasefire risk rises. The key risk is political reversal in Europe if fiscal stress forces delays, but that is more likely to slow the pace than to unwind the capex cycle entirely; procurement already in motion tends to survive coalition changes.

The U.S. decline looks transitory and may actually be a reset of the funding base rather than a structural downshift. If 2026 U.S. appropriations move back above $1T, the market could be underestimating the re-acceleration in domestic defense primes, especially those with high exposure to munitions replenishment and missile defense. The consensus may be too focused on headline peace dynamics and not enough on inventory depletion, restocking, and the fact that allied procurement budgets now have to compensate for a less reliable U.S. transfer mechanism.

The contrarian angle is that the best risk/reward may be in European defense and industrial infrastructure enablers rather than the obvious U.S. megacaps. Those names are still priced off earnings that lag order intake by 12-18 months, so there is room for estimate revisions even if the stocks have already moved on geopolitics. A downturn in broad European growth is the main offset, but defense procurement is one of the few discretionary-to-nondiscretionary budget lines that can keep expanding in a soft macro tape.

Key Decisions for Investors

• Long RHM.DE / BA.L as a 12-24 month relative winner versus broad European cyclicals; buy on macro dips, target a re-rating as NATO procurement visibility improves, with downside limited by backlog support.
• Pair trade: long NOC or LMT / short XLI for a 6-12 month horizon to isolate defense restocking from general industrial slowdown; the thesis is that missile-defense and munitions demand remains underappreciated while manufacturing cyclicals soften.
• Add to ASML/ERM-type Europe industrial infrastructure enablers only on weakness if they have defense-adjacent exposure through secure equipment and supply-chain localization; the risk/reward is weaker than pure defense but benefits from sovereign capex localization.
• Use call spreads on RTX or GD into any pullback over the next 1-3 months; upside comes from estimate revisions as 2026 budgets translate into order guidance, while defined-risk structures avoid multiple compression if geopolitics calms.
• Avoid chasing the most obvious U.S. aid-sensitive names; prefer munitions, air-defense, and battlefield electronics over platform-heavy contractors, because replacement cycles are shorter and less exposed to headline-driven procurement pauses.