Defence stocks are outpacing the ASX 200 this year as governments worldwide pour billions into security, drones, and advanced weapons technology. In an era marked by rising geopolitical tensions, national security has become one of the few spending areas that rarely faces cuts — and that consistency has translated into steady growth for defence contractors and investors alike.
Even when funding pauses, history shows the next cycle usually brings a bigger rebound. That’s because defence isn’t optional; it’s one of the few bipartisan policy areas where long-term investment remains non-negotiable.
The Global Spending Surge
The latest commitments reflect a new level of urgency. NATO members recently agreed to lift collective defence spending to 5% of GDP by 2035, up from the 2% target in place since 2014. Australia has pledged an additional $50.3 billion to modernise the Defence Force, while Japan’s new Prime Minister, Sanae Takaichi, has accelerated the nation’s plan to reach 2% of GDP in defence spending by 2026 — two years earlier than previously scheduled.
This spending boom isn’t just about preparing for conflict. It’s about maintaining readiness, adopting new technologies, and ensuring industrial capability across allied nations. Fighter jets, naval vessels, and land systems require constant upgrades, and the rapid evolution of drone and AI-based systems has created entirely new categories of spending — both for offensive capabilities and protection against them.
That steady flow of contracts, upgrades, and infrastructure projects has made defence one of the few truly enduring investment themes.
Stocks Powering the Defence Boom
Palantir Technologies (NASDAQ: PLTR)
Palantir continues to prove that data is now as crucial to defence as hardware. The U.S. analytics giant counts the Department of Defense, Homeland Security, and multiple intelligence agencies among its clients, providing software that integrates and analyses massive datasets for military and strategic decision-making.
Shares recently surged nearly 9%, leading the S&P 500, amid optimism that a resolution to the U.S. budget impasse will unlock new federal contracts. Palantir’s AI-driven software architecture has become deeply embedded across U.S. and allied defence networks — a structural advantage that few competitors can match.
Rheinmetall AG (ETR:RHM)
German defence heavyweight Rheinmetall continues to capitalise on Europe’s rearmament wave. Its joint venture Artec recently secured a €3.4 billion contract to supply Schakal infantry fighting vehicles to Germany and the Netherlands, with an option for hundreds more.
The deal cements Rheinmetall’s role at the heart of Europe’s military modernisation, supported by Germany’s commitment to major long-term defence investment. The stock has more than doubled in 2025, mirroring momentum across European peers such as BAE Systems, as ongoing conflicts in Ukraine and the Middle East drive sustained procurement cycles.
BAE Systems (LON:BA.)
The UK’s largest defence and aerospace contractor, BAE Systems, continues to deliver robust growth across all major segments. Its order backlog has climbed to a record £75 billion, reflecting strong demand for aircraft, submarines, vehicles, and advanced systems from NATO and allied nations.
First-half 2025 sales grew at double digits, with upgraded full-year guidance and margin expansion across its Platforms & Services division. The company’s FalconWorks division — focused on unmanned and autonomous systems — has become a key innovation driver.
With an order book approaching £260 billion, or roughly eight times annual revenue, BAE’s scale and diversification provide stability and long-term visibility rare in the sector. The stock has risen over 300% in the past five years, with further upside likely as NATO budgets continue to expand.
AeroVironment (NASDAQ:AVAV)
AeroVironment, a leader in unmanned aerial and defence systems, has seen analyst price targets raised from $384 to $409, reflecting its expanding market opportunity and accelerating growth outlook.
The company recently won major U.S. Army contracts, including a $95.9 million Next-Generation Counter-UAS Missile program, and signed a Memorandum of Understanding with Korean Air to develop uncrewed aircraft tailored to regional defence needs.
It has also entered the space domain, securing a $240 million order for laser communications terminals to be deployed in orbit — extending its technology leadership beyond traditional defence applications.
While analysts remain mindful of valuation risks, AeroVironment’s projected 42% revenue growth and expanding profitability underline its strong positioning in next-generation military technologies.
DroneShield (ASX:DRO)
Few ASX-listed companies have captured investor attention like DroneShield, which develops counter-drone and autonomous threat detection systems used by defence forces, governments, and critical infrastructure operators worldwide.
Revenue surged 750% year on year to $92.9 million last quarter, with the company turning cash flow positive and sitting on $212 million in cash. Its sales pipeline now exceeds $2.5 billion, reflecting the explosive growth in demand for drone “detect and defeat” technologies.
Recent AI upgrades have doubled processing speeds and improved targeting accuracy, positioning DroneShield as a global leader in the rapidly expanding counter-drone segment. The stock has risen nearly 400% in the past 12 months, underscoring investor confidence in its long-term trajectory.
Why Defence is a Distinct Investment Theme
Unlike trend-driven sectors, defence investment is grounded in tangible spending — real budgets, real contracts, and long-term service agreements. Once a program is awarded, it typically runs for years or decades, generating recurring revenue streams that resemble infrastructure projects more than traditional technology contracts.
Defence spending also tends to be counter-cyclical: it often increases when broader economic confidence falls. For investors seeking diversification and resilience, that makes defence an appealing addition to a balanced portfolio.
| RISK | WHAT TO WATCH | |
|---|---|---|
|
Geopolitics |
Ukraine, Middle East, Taiwan tensions |
Trade Wars |
Looking Ahead
With governments recommitting to long-term defence investment and the private sector accelerating innovation, the defence theme shows few signs of slowing. Companies like DroneShield, AeroVironment, Palantir, Rheinmetall, and BAE Systems are positioned at the centre of this transformation — each bringing distinct strengths across hardware, software, and integrated intelligence.
As nations shift from reactive spending to proactive readiness, investors have an opportunity to participate in a structural trend that could define the next decade of industrial growth.
For investors who prefer not to delve too deeply into defence technology, exchange-traded funds (ETFs) provide an easy way to gain diversified exposure to the sector.
RISK
WHAT TO WATCH
Geopolitics
| RISKS | WHAT TO WATCH |
|---|---|
| Geopolitics | Ukraine, Middle East, Taiwan tensions |
| Trade Wars | US-China tariffs, Mexico sanctions |
| Sticky Inflation | Especially in energy and services |
| Growth Concerns | Weakening consumer demand |
| US Debt | $1.9T deficit + $1T in interest payments |
| Climate Risk | Infrastructure damage and supply chain disruption |
| Valuation Risk | Over concentration in megacap tech |
Tony Raikes
CPA. B.Acc Dip.FP Grad.Cert.Mgt
Private Client Advisor
Authorised Representative No. 00448193
Prince Wealth Founder and Financial Adviser Tony Raikes utilises a variety of advanced risk management strategies to protect clients’ portfolios and is dedicated to providing a comprehensive financial planning experience, empowering clients to make confident and informed decisions about their financial future.
