The old defense playbook is getting a battlefield upgrade. Global military spending reached a record $2.9T last year, and following procurement trends reveals where the next winners could emerge.
Rewiring the budget: For the first time, the Pentagon's FY2026 budget includes a dedicated $13.4B line item for autonomy and autonomous systems. That covers drones, unmanned platforms, and the software that powers them. Creating a standalone budget category signals that autonomous systems are becoming a long-term defense priority rather than a one-off spending initiative.
- The autonomy budget includes $9.4B for unmanned aerial vehicles, alongside $3.1B for counter-drone systems and $1.7B for autonomous surface vessels.
- Defense electronics supplier Mercury Systems, whose tech powers autonomous and mission-critical platforms, reported record $348M bookings last quarter, up 73.7% year over year.
NATO's Defense Spree
The Ankara NATO summit added fuel to the spending wave, with billions in new arms deals announced at the Defense Industry Forum. European members also committed to spending 5% of GDP on defense, implying roughly $1T in annual military outlays. Trump signaled he may lift sanctions on Turkey and revisit F-35 sales, benefiting Lockheed Martin and GE Aerospace.
- Rheinmetall, BAE Systems, and Thales have averaged 82% gains over the past two years, though momentum has flattened as investors grow more selective about legacy vs. tech-enabled platforms.
- Lockheed Martin and Northrop Grumman have fallen 19% and 24% since the US-Iran conflict began as political risk weighed on sentiment.
The valuation reset: Panmure Liberum strategist Joachim Klement told CNBC that electronic warfare is evolving into a tech phenomenon and the next wave of defense spending will favor AI-enabled and drone-focused companies over traditional arms makers. The market is already reflecting that shift, with AeroVironment and Red Cat rising while the major defense primes fall. In modern warfare, the smartest technology is becoming the most valuable weapon.
