Hello Elephants,
As we approach 2025, geopolitical instability continues to shape global markets, particularly in the defence sector. With conflicts raging in Ukraine, the Middle East, and rising tensions in Asia, countries are boosting their military budgets at unprecedented rates. This creates significant opportunities for investors looking to position themselves in defence stocks now to capture future growth. In this guide, we’ll explore which stocks and ETFs are poised to perform well in 2025, focusing on U.S. giants, international companies, and ETFs that offer diversified exposure.
With European rearmament, Asia’s military build-up, and increased NATO defence spending, now is the time to evaluate which defence investments are worth adding to your portfolio before 2025. We’ll cover the standout companies and ETFs that can provide strong returns in an increasingly militarised world.
Rising Global Conflicts and Defence Budgets
Europe: NATO’s Rearmament and the Trump Effect
Since the Russia-Ukraine war began in 2022, European countries have significantly ramped up military spending, aiming to meet NATO’s 2% defence spending target. The fear that Donald Trump could return to power in 2025 and reduce U.S. support for NATO has further accelerated Europe’s rearmament. Countries like Germany and Poland are spending heavily on new tanks, aircraft, and missile systems, boosting demand for European and U.S. defence companies alike.
- Germany: Germany’s military expansion has been rapid, driven by a €100 billion defence fund focused on upgrading tanks, fighter jets, and naval forces. Rheinmetall has been a key beneficiary, with demand for its Leopard 2 tanks and other military hardware surging.
- Poland: Positioned on NATO’s eastern flank, Poland is increasing its defence budget to 4% of GDP—double the NATO requirement. The Polish government is investing heavily in U.S. and European military equipment, such as tanks and missile defence systems.
Asia: China-Taiwan Tensions and Japan’s Rapid Rearmament
The China-Taiwan conflict continues to heighten, with frequent military incursions by China into Taiwanese airspace. Taiwan’s defence budget is swelling to fund anti-aircraft, missile, and cybersecurity defences, largely benefiting Lockheed Martin and Raytheon.
At the same time, Japan is rearming at an unprecedented rate, driven by both China’s growing military presence and North Korea’s missile tests. Japan’s expanded military budget is aimed at upgrading missile defences, building new naval fleets, and investing in advanced technology, offering significant opportunities for defence contractors.
These developments are setting the stage for long-term growth in the defence industry, both in the U.S. and internationally.
Israel-Hamas Conflict and Rising Tensions with Iran and Lebanon
The Israel-Hamas conflict escalated sharply in October 2023, with Hezbollah in Lebanon increasingly involved. Backed by Iran, Hezbollah’s missile attacks have drawn Israel into further military operations in southern Lebanon, raising the risk of a broader regional conflict. This situation has led to increased military spending by Israel and potential involvement from other Middle Eastern nations, driving further demand for defence technology in the region.
The Russia-Ukraine War and European Rearmament
The Russia-Ukraine war, now in its third year, continues to reshape European defence policies. NATO countries, fearing further Russian aggression and potential shifts in U.S. support, have dramatically increased military spending. Germany and Poland have been leading this rearmament, purchasing advanced systems like tanks and missile defence platforms, significantly boosting the defence industry across Europe.
Other Global Conflicts Driving Defence Spending
Conflicts beyond Europe and the Middle East also contribute to rising global military spending. In Africa’s Sahel region, countries like Mali and Burkina Faso are fighting jihadist insurgencies. Ongoing violence in Syria, civil unrest in Sudan, and internal conflict in Myanmar all continue to create demand for military equipment and defence technology worldwide.
How Stocks Perform During Wartime
Wars and conflicts tend to create short-term market volatility, but defence companies have historically seen increased demand and rising stock prices. Let’s review some examples of how stocks have reacted during major wars:
- World War I: Initial panic caused stock markets to crash, but as war production ramped up, companies producing weapons and supplies saw significant gains.
- World War II: The stock market initially declined when the war broke out, but military production led to massive growth, with the Dow Jones gaining approximately 50% during the war. Defence companies that produced aircraft, tanks, and naval vessels thrived.
- Vietnam War: This war spanned many years, and while defence contractors benefitted from military spending, the broader U.S. economy faced inflation and stagnation, leading to a lacklustre stock market overall.
- Gulf War: Markets dropped ahead of the conflict due to rising oil prices, but defence stocks quickly recovered, driven by increased military spending and demand for replacements of weapons used in the war.
- Ukraine Conflict: The ongoing war between Russia and Ukraine has caused European defence stocks to soar, especially as countries like Germany and Poland increase their military budgets to defend against future threats.
Historically, defence stocks tend to perform well in times of conflict, as governments increase spending on military equipment, technology, and services. This trend is likely to continue as geopolitical tensions remain high going into 2025.
Best U.S. Defence Stocks to Buy Now for 2025
Here are the top U.S. defence stocks to consider adding to your portfolio before 2025. These companies are key contractors for the U.S. Department of Defense and are well-positioned to benefit from rising global defence spending.
1. General Dynamics (GD)
- Yahoo Finance Link
- Stock Performance: Up 12.9% over the last 12 months.
- Key Focus: Tanks, submarines, defence IT.
- Why Buy: General Dynamics produces the M1 Abrams tank and Virginia-class nuclear submarines, both of which are critical to U.S. military operations. It also has a strong defence IT division, providing cybersecurity and network services. With 72% of its revenue from the U.S. government, General Dynamics offers predictable long-term growth driven by stable defence contracts.
2. Northrop Grumman (NOC)
- Yahoo Finance Link
- Stock Performance: Up 15.7% over the last year.
- Key Focus: Stealth bombers, nuclear deterrence, unmanned systems.
- Why Buy: Northrop Grumman is a leader in nuclear deterrence and stealth technology, producing the new B-21 Raider stealth bomber. Its focus on unmanned military systems and space defence makes it a major player in modern warfare. With long-term U.S. contracts and growing demand for space and cybersecurity, Northrop Grumman is poised for future growth.
3. TransDigm Group (TDG)
- Yahoo Finance Link
- Stock Performance: Up 49.2% over the past 12 months.
- Key Focus: Aerospace components and aftermarket parts.
- Why Buy: TransDigm specialises in producing aircraft components used in both commercial and military sectors. Its steady growth comes from its dominant position in the aerospace supply chain, coupled with strategic acquisitions. TransDigm is a key supplier for U.S. military aircraft, offering both high growth and reliable long-term demand.
4. Howmet Aerospace (HWM)
- Yahoo Finance Link
- Stock Performance: Up 30.5% in the last year.
- Key Focus: Jet engine components, lightweight aerospace materials.
- Why Buy: Howmet manufactures lightweight metal components essential for military aircraft. Its reputation for delivering on-time has boosted its market share in the aerospace sector, and as defence spending increases, so too will the demand for Howmet’s products.
5. Curtiss-Wright (CW)
- Yahoo Finance Link
- Stock Performance: Up 17.8% over the past 12 months.
- Key Focus: Defence electronics, nuclear energy technology.
- Why Buy: Curtiss-Wright provides advanced defence electronics used in avionics, communications, and weapons systems. The company also has exposure to the nuclear energy sector, offering additional growth potential as military and energy technologies converge. With strong profit margins, Curtiss-Wright is an attractive option for defence-focused investors.
6. Joby Aviation (JOBY)
- Yahoo Finance Link
- Stock Performance: Up 35.1% over the last year.
- Key Focus: Electric vertical take-off and landing (eVTOL) aircraft.
- Why Buy: Joby is developing eVTOL aircraft, which have significant potential in both military and civilian markets. With a $131 million contract from the U.S. Department of Defense, Joby’s technology could revolutionise military logistics, making it a high-risk, high-reward opportunity.
7. Embraer (ERJ)
- Yahoo Finance Link
- Stock Performance: Up 28.9% over the past year.
- Key Focus: Military and regional aircraft.
- Why Buy: Embraer is a Brazilian aerospace company known for its A-29 Super Tucano military aircraft. With strong demand for both its military and commercial jets, Embraer is well-positioned to benefit from increasing defence budgets in Latin America and other regions.
International Defence Stocks Soaring into 2025
International defence stocks have seen exceptional growth in the past year, driven by increased global military spending. These companies are poised for continued growth as geopolitical tensions remain high.
Rheinmetall AG (Germany)
- Yahoo Finance Link
- Stock Performance: Up 105.5% over the past 12 months.
- Key Focus: Tanks, ammunition, armoured vehicles.
- Why Buy: Rheinmetall is a top supplier of land defence systems for European nations. Demand for its Leopard 2 tanks has surged as European countries ramp up military spending in response to Russia’s invasion of Ukraine. With long-term contracts and a strong pipeline, Rheinmetall is set for continued growth.
Rolls-Royce Holdings (UK)
- Yahoo Finance Link
- Stock Performance: Up 138% in the last year.
- Key Focus: Military aircraft engines, naval vessels.
- Why Buy: Rolls-Royce is a leader in aerospace engine production, supplying engines for military aircraft and naval vessels. Its defence segment provides a stable revenue stream, even as its civil aerospace division recovers from the pandemic. With restructuring efforts boosting profitability, Rolls-Royce is well-positioned for future growth.
Kongsberg Gruppen ASA (Norway)
- Yahoo Finance Link
- Stock Performance: Up 55% over the past 12 months.
- Key Focus: Missile systems, naval defence technology.
- Why Buy: Kongsberg is a leader in advanced missile systems, including the Naval Strike Missile, which is widely used by NATO countries. With growing demand for high-tech military solutions, Kongsberg is positioned for long-term growth as global military budgets rise.
Defence ETFs: A Diversified, Safer Approach
For investors seeking diversified exposure to the defence sector with less volatility, ETFs are an excellent choice. Here’s how the top defence ETFs have performed over the last 12 months:
1. Invesco Aerospace & Defense ETF (PPA)
- Yahoo Finance Link
- Performance: Up 24.58% in the past year.
- Why Buy: PPA offers exposure to a broad range of U.S. aerospace and defence companies. With holdings in both large contractors like Lockheed Martin and smaller innovators, it provides a balanced, diversified portfolio focused on the growing defence sector.
2. SPDR S&P Aerospace & Defense ETF (XAR)
- Yahoo Finance Link
- Performance: Up 18.9% in the last 12 months.
- Why Buy: XAR uses a modified equal-weight strategy, giving smaller defence companies more representation. This ETF is ideal for investors looking to capture growth in both established and emerging defence firms.
3. iShares U.S. Aerospace & Defense ETF (ITA)
- Yahoo Finance Link
- Performance: Up 20.8% in the past year.
- Why Buy: ITA is heavily concentrated in major U.S. defence contractors like Raytheon and Boeing, offering exposure to the sector’s biggest players. This ETF is a good choice for investors seeking stable, long-term returns tied to U.S. military spending.
Outlook for Defence Stocks in 2025
Defence stocks continue to be a strong investment option as global conflicts drive governments to increase military budgets. Whether you’re interested in U.S. giants like General Dynamics and Northrop Grumman or looking for international opportunities with companies like Rheinmetall and Rolls-Royce, the defence sector is poised for significant growth as we head into 2025. For those seeking a more diversified approach, ETFs like PPA, XAR, and ITA offer exposure to the entire sector with reduced volatility.
Now is the time to position your portfolio to benefit from the rising demand for military equipment and technology as the world gears up for future conflicts. Unsure on how much to invest in the stock market? Check out our guide here!
Stay alert, Elephants, and keep your portfolios fortified for what’s to come!
