David Bianco, Chief Investment Strategist for the Americas at DWS Group, named aerospace and defense a core portfolio theme on July 8, 2026. Bianco's analysis, reported by SeekingAlpha, argues that elevated global defense expenditures will persist for several years, creating a durable investment tailwind. The sector's forward price-to-earnings ratio of 18.5x reflects this growth premium. Global military spending reached a new record of $2.24 trillion in 2025, a 3.7% real-terms increase from the prior year, according to SIPRI data.
Context — why this matters now
Geopolitical tensions have reset baseline defense budgets across NATO and the Indo-Pacific. The last comparable multi-year defense budget surge followed the 9/11 attacks, with U.S. Pentagon spending growing from $304 billion in FY2001 to a peak of $767 billion in FY2010, a 152% nominal increase over nine years. The current cycle differs, driven by near-peer competition rather than counter-terrorism, focusing spending on advanced technology and industrial capacity rebuild.
The current macro backdrop features a 10-year Treasury yield of 4.2% and a Fed policy rate of 3.75-4.00%. Defense contractors, with their long-duration government contracts, are generally less sensitive to rate fluctuations than growth-oriented tech sectors. The catalyst for the current focus is the convergence of ongoing conflicts, multi-year procurement authorizations in the U.S. 2024 and 2025 National Defense Authorization Acts, and European nations finally meeting NATO's 2% of GDP spending target.
A shift in political consensus underpins the spending persistence. Bipartisan U.S. support for defense, combined with European rearmament mandates, transforms what were once cyclical budgets into structural commitments. This transition from discretionary to mandatory spending reduces fiscal policy risk for major contractors, providing earnings visibility rarely seen outside regulated utilities.
Data — what the numbers show
The iShares U.S. Aerospace & Defense ETF (ITA) has gained 12.4% year-to-date, outperforming the S&P 500's 7.8% return. The sector's aggregate market capitalization for the largest five U.S. primes—Lockheed Martin, RTX, Northrop Grumman, General Dynamics, and Boeing's defense unit—exceeds $750 billion. Lockheed Martin's backlog stood at $161 billion at the end of Q1 2026, representing over three years of revenue at current run rates.
Revenue growth projections for the sector average 6-8% annually through 2028, outpacing expected nominal GDP growth. This is a marked acceleration from the 1-3% annual growth seen in the 2015-2020 period following post-Afghanistan drawdowns. Order inflows for next-generation systems like the B-21 Raider, F-35 Lot 18, and Columbia-class submarines are locking in production lines for the next decade.
| Metric | 2023-2025 Average | 2026-2028 Projection |
|---|
| Sector Revenue Growth | 4.5% | 7.2% |
| Backlog-to-Revenue Ratio | 2.8x | 3.4x |
| Operating Margin | 11.5% | 12.8% |
European defense stocks, such as BAE Systems and Rheinmetall, have outperformed their U.S. peers in local currency terms over the past 24 months, with share price gains exceeding 85% as they play catch-up from a lower spending base.
Analysis — what it means for markets / sectors / tickers
The primary beneficiaries are prime contractors with exposure to high-priority domains: space (Northrop Grumman, L3Harris), undersea warfare (General Dynamics), and missile defense (Lockheed Martin, RTX). A secondary wave of gains should reach sub-system and component suppliers like Heico Corporation and TransDigm Group, which capture margins across multiple prime programs. For every 1% increase in U.S. defense outlays, analysts estimate a 0.8-1.2% earnings boost for the top five primes.
A key counter-argument is budget sustainability. Projected U.S. fiscal deficits exceeding 5% of GDP could eventually force a spending reckoning, though political will for defense cuts remains low. Execution risk is another limitation; labor shortages and supply chain bottlenecks could delay contract fulfillment and compress margins, capping near-term upside.
Positioning data shows institutional investors have been net buyers of defense ETFs for 14 consecutive weeks, the longest streak since 2017. Hedge fund short interest in the sector sits at a five-year low of 1.8% of float, indicating a consensus long view. Flow analysis reveals rotation from consumer discretionary and some big-tech names into industrial and defense shares amid a re-rating for geopolitical resilience.
Outlook — what to watch next
Immediate catalysts include Q2 2026 earnings reports from major primes, starting with Lockheed Martin on July 23. Guidance increases for 2027 and commentary on supply chain normalization will be critical. The next U.S. defense budget request for Fiscal Year 2028, expected in February 2027, will signal the medium-term trajectory, with particular focus on Navy shipbuilding and Air Force NGAD program funding.
Technical levels to monitor include the ITA ETF holding above its 200-day moving average, currently at $124.50, which has served as support during recent market pullbacks. A sustained break above the $135 resistance level, last tested in late 2025, would confirm the bullish breakout and likely trigger further institutional allocation.
The outcome of several key U.S. and European elections in late 2026 will test the durability of the defense spending consensus. Should defense budgets maintain bipartisan support post-election, it would validate the multi-year thesis and likely lead to further multiple expansion for sector stocks.
Frequently Asked Questions
How does current defense spending compare to Cold War levels?
Current U.S. defense spending as a percentage of GDP is approximately 3.2%, significantly below Cold War peaks near 6% during the Reagan administration in the mid-1980s. In absolute inflation-adjusted terms, however, today's budget is larger due to economic growth. The composition has shifted dramatically from personnel and conventional platforms to research, development, and high-technology systems like cyber, space, and AI, which command higher margins for contractors.
What does this trend mean for retail investors without direct stock access?
Retail investors can gain exposure through low-cost ETFs like the iShares U.S. Aerospace & Defense ETF (ITA) or the SPDR S&P Aerospace & Defense ETF (XAR). These funds provide diversified exposure across prime contractors, suppliers, and commercial aerospace. An alternative is mutual funds with a dedicated defense or industrial sector focus. Given the sector's cyclicality, dollar-cost averaging over time may mitigate timing risk versus a single lump-sum investment.
Are commercial aerospace companies like Boeing and Airbus also beneficiaries?
