Defense Stocks Poised for Further Gains Amid Rising Global Spending

The defense sector has delivered a remarkable performance, with defense stocks soaring roughly 100% from their April 2025 lows—a surge that rivals even the rebound seen after the 2009 financial crisis. For investors seeking defense stocks to buy, the pivotal question remains whether this momentum reflects genuine structural opportunity or excessive enthusiasm. According to Bank of America analysis, the evidence increasingly points toward the former. Multiple tailwinds are converging to support defense stocks: accelerating global defense spending, depleted military inventories requiring restocking, and a strategic pivot toward advanced technologies including artificial intelligence.

Global Defense Budgets Climbing: A Structural Tailwind for Defense Stocks

The outlook for defense spending has fundamentally shifted. U.S. defense budgets now exceed $1 trillion annually, with NATO allies moving toward a 3.5% spending target relative to gross domestic product by 2035. Should non-U.S. NATO members reach this benchmark, spending would increase by approximately $370 billion, according to Bank of America Global Research. Retired General Arnold Punaro has publicly suggested the U.S. defense budget could eventually reach $1.5 trillion—roughly a 50% increase from current fiscal levels. While some analysts remain skeptical about such aggressive growth targets given the $42 trillion federal deficit, the directional trend appears unmistakable: defense spending is moving higher, not lower.

Prime Defense Contractors Stand to Benefit Most

The key defense stocks to buy include major prime contractors positioned to capture growing demand. Bank of America equity analyst Ronald Epstein highlights firms like Northrop Grumman Corp. (NYSE:NOC), RTX Corp. (NYSE:RTX), and L3Harris Technologies Inc. (NYSE:LHX) as primary beneficiaries. These defense stocks are attracting investor interest due to expanding backlogs and capacity constraints across the sector. Two critical areas warrant attention: shipbuilding capabilities and air and missile defense systems, including initiatives such as the “Golden Dome” program. Additionally, missile and munitions stockpiles remain significantly depleted following years of support provided to Ukraine and allied nations, creating multi-year restocking cycles that should sustain defense stocks demand.

AI Integration: The Next Frontier for Defense Stocks Growth

Emerging technologies are reshaping the competitive landscape for defense stocks. Future conflicts will differ materially from historical patterns, prompting the Department of Defense to push contractors toward greater automation, autonomy, and artificial intelligence deployment across operational domains. Defense contractors that successfully integrate AI at both enterprise and battlefield levels could achieve profit margins approaching those of commercial aerospace or technology firms—a meaningful upside catalyst for defense stocks valuations. This technological imperative has become non-negotiable for contractors seeking long-term viability, creating differentiation opportunities among defense stocks.

Valuations Justify the Upside for Defense Stocks

A nearly 100% rally naturally invites scrutiny regarding valuations. However, unlike speculative technology bubbles driven by sentiment alone, this advance in defense stocks appears anchored to concrete fundamentals. Governments across the U.S. and NATO are committing to multi-year budget increases. Geopolitical tensions persist across multiple regions—the Middle East remains volatile, Russia’s war in Ukraine continues, and strategic focus on the Pacific is intensifying. Global missile and munitions inventories are depleted. Defense has become explicit policy priority. Against this backdrop, earnings estimates for defense stocks are rising alongside expanding backlogs and production capacity. Bank of America’s analysis suggests investors may still be witnessing the opening phase of a sustained structural upcycle rather than the tail end of a tactical bounce, positioning defensive stocks for sustained appreciation ahead.