Defense stocks surge as governments boost spending on weapons, AI battlefield technology

Defense stocks and sector ETFs have reached record highs as global governments significantly increase military spending to address rising geopolitical tensions and modernize battlefield technology. The surge is driven by a massive $1.5 trillion U.S. defense budget request for fiscal year 2027 and a strategic push to replenish depleted munitions stockpiles. This shift is creating substantial opportunities for both traditional contractors and non-traditional industrial players like major automakers entering the defense supply chain.

The iShares U.S. Aerospace & Defense ETF (ITA) recently reached its first intraday record high in four months, reflecting a broader rally among major industry players such as GE Aerospace, Boeing, RTX, and Howmet Aerospace. Analysts from Franklin Templeton attribute this momentum to countries assuming greater responsibility for their own security and investing in advanced capabilities to replace obsolete systems. Key areas of growth include cybersecurity, space-based defenses, and modernized military infrastructure, alongside a critical focus on integrating artificial intelligence across the battlefield.

A primary catalyst for the sector's growth is the Department of Defense’s fiscal year 2027 budget request of $1.5 trillion, representing a 44% increase over the previous year and the largest single-year funding request since World War II. Recent major awards include a $35.3 billion multiyear contract for Lockheed Martin to produce Terminal High Altitude Area Defense (THAAD) missiles, which cost approximately $15.5 million per unit. Additionally, RTX secured a $400 million deal for medium-range air-to-air missiles and is scaling up production of Tomahawk missiles, which cost $2.6 million each, following heavy usage during the war in Iran.

To address the urgent need to replenish munitions stockpiles, the U.S. government has engaged top executives from Lockheed Martin, Boeing, and Honeywell to accelerate production timelines. This demand is also drawing non-traditional companies into the defense sector; General Motors recently signed a multibillion-dollar deal with Lockheed Martin for high-rate manufacturing of weapons components, while Ford has begun pursuing defense contracts in the U.S. and Europe. Boeing has further diversified its portfolio with a $2 billion U.S. Space Force contract for communications satellites and a seven-year agreement to produce PAC-3 interceptor missiles.