Geopolitical dynamics and the defense spending boom
Even before the most recent tensions in the Middle East and elsewhere that have taken a heavy human toll, governments in many parts of the world had been ramping up their defense spending.
Consider last year’s international bull market, which was attributable in large part to significant rallies for defense stocks in Europe, Japan, and elsewhere.
In Germany, for example, defense spending roughly doubled from just over 1% of GDP a decade ago to more than 2% last year, and current spending plans have that jumping to 3.5% in 2026. As a result, 2025 was the best year on record for German defense stocks.
The Japanese government recently approved 2026 plans for a record $58 billion defense budget—a nearly 4% increase over 2025 and the 12th straight yearly increase.
And then there’s the US, which spends more on defense than any other country. Defense spending represents roughly 13% of the total US federal budget, and the 2026 fiscal year defense appropriations bill recently signed by President Trump represents a substantial annual increase.
Todd Haggerty, manager of the Fidelity® Select Defense and Aerospace Portfolio (), thinks this trend will continue. “I see higher US defense spending as likely to continue through early 2029,” Haggerty says.
In addition to a renewed capex push by many of these companies, bolstered by a buildout to restore used stockpiles, Haggerty is looking beyond the current conflicts to longer-term trends that could play out for years. “For example, there is a proposal to spend an estimated $150 billion on the United States’ ‘Golden Dome’ project, a multi-layer missile defense system,” Haggerty notes.
