The World Is Spending More on Defence Than Ever

The numbers are striking. Global military spending hit a record $2.89 trillion in 2025, according to the Stockholm International Peace Research Institute, and it's been rising for eleven consecutive years. As a share of global economic output, it's now at its highest point since 2009.

This is a fundamental shift in where governments are directing money, and that has consequences for any investor.

Here's what's driving it, and what to consider.

The Global Picture

The United States remains by far the largest military spender at around $954 billion in 2025, even after cutting its budget by roughly 7.5% when new aid to Ukraine stalled.

China is second at an estimated $336 billion, up around 7%.

But the most striking movement is in Europe.

Spending jumped 14% to $864 billion, with Germany up 24% and Spain up 50%.

These represent a reversal of decades of post-Cold War budget cuts, driven by the war in Ukraine and a growing sense among European governments that they can no longer assume the US will always be there to pick up the security tab.

Europe's Rearmament: A Long-Term Shift

For most of the past thirty years, European governments cut defence budgets on the assumption that a major conflict on the continent was unlikely. Unfortunately that assumption no longer holds, and the war in Ukraine changed the calculus entirely.

NATO members have been under pressure to meet a spending target of 2% of GDP for years. Most ignored it, but now, Germany has exceeded that threshold for the first time since 1990, and the EU has outlined plans to mobilise up to 800 billion euros for regional security by 2030.

The key question for investors is whether this is a temporary response to an acute crisis or something more durable - and the evidence leans toward the latter.

Multi-year rearmament programmes, constitutional changes to unlock defence funding, and long-term procurement contracts don't get reversed quickly. This looks more like a decade-long shift than a short-term spike.

Asia Is Moving Too, Just More Quietly

Asia's spending increases may be getting less attention than Europe's, but the shift is real.

Japan raised its military budget by nearly 10% to $62 billion, its highest share of GDP since 1958, and lifted a long-standing ban on exporting lethal weapons.

Taiwan increased spending by 14% as Chinese military activity around the island reached record levels.

Asia and Oceania as a whole lifted spending by just over 8% to around $681 billion, with Australia, the Philippines, and South Korea all expanding their capabilities too.

The common thread is uncertainty about US security commitments. Countries that previously relied on American military presence are investing more in their own capacity, and those investments are likely to continue regardless of who sits in the White House.

What About Defence Stocks?

All of this government spending has to go somewhere, and a lot of it is landing on the balance sheets of defence companies.

Rheinmetall in Germany rose 154% in 2025.

South Korea's Hanwha Aerospace surged 193%.

BAE Systems in the UK gained nearly 50%.

These gains reflect real increases in government orders and long-term contracts, not just speculation. But a few things are worth keeping in mind before drawing conclusions about your own portfolio.

Defence is a politically sensitive sector. Export licences, sanctions, shifting alliances, and changes in government can all affect revenue in ways that are hard to predict. The sector is also tied to geopolitical cycles that don't always follow the same rhythm as the broader economy.

There's also the values question, which is a big concern for many investors. Some are comfortable owning defence companies as part of a broad fund, while others are not.

It’s good to get clear on whether you draw a line at companies only involved in certain type of weaponry, whether you’re only comfortable with firms that mainly supply defensive equipment, or whether you’d rather avoid the sector altogether.

Many sustainable funds now use these kinds of screens in their ESG policies, excluding companies with any revenue from banned or controversial weapons, while still allowing exposure to conventional defence in some cases.

What This Means for You

If you invest in broad global ETFs, you likely already have some exposure to defence companies through your existing holdings. As governments increase military budgets, defence-related sectors tend to grow as a share of broader indices, which can shift your returns in ways you might not have actively chosen.

For anyone considering a more targeted bet on defence, the usual cautions apply. Single-sector or single-stock positions carry more risk than diversified funds, and you should keep in mind that the sector is heavily dependent on politics.

The broader story here is one of a world recalibrating how it thinks about security. Whether that makes defence a compelling investment or one you'd rather avoid, understanding what's driving it is useful context for reading the markets ahead.

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What are your thoughts on investing in defence? Share in the comments.