Editor’s Note: Amid faltering economies and volatile stock markets, investors are looking for safe havens. One tried-and-true bunker? Aerospace/defense.

As the world arms itself (again), and policymakers fumble their way into old mistakes, certain military-related companies are poised to thrive.

Below, I explain why aerospace/defense stocks and funds provide not only growth opportunities but also serve as recession and inflation hedges. I also pinpoint my specific investment recommendations in the sector. Think of these plays as “weapons of mass wealth.”

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Guns, not butter…

Global military spending reached a jaw-dropping $2.7 trillion in 2024, representing a 9.4% year-over-year increase, according to the latest data from the Stockholm International Peace Research Institute (SIPRI). That’s not just a number—it’s a loud, clanging alarm bell ringing from capitals across the globe, where military budgets are surging like it’s 1939 all over again.

The United States remains by far the world’s largest military spender, at $824.3 billion in 2024, an increase of nearly 4% from 2023. Topping the list of big-ticket items in the Pentagon’s 2024 budget: F-35 stealth fighters and their related combat systems ($61.1 billion); new ships for the U.S. Navy ($48.1 billion); upgrading the U.S. nuclear arsenal ($37.7 billion); and missile defense ($29.8 billion).

China followed the U.S. in overall military spending with an estimated $314 billion. Russia, which invaded Ukraine in 2022 and remains mired there, showed an estimated increase of at least 38%. However, the SIPRI notes that Russia’s amount is probably even greater because the autocratic Putin regime is less than transparent about its true military expenditures.

More than 100 countries increased their defense spending last year, with Europe topping Cold War-era levels. Apparently, nothing wakes up a finance ministry faster than the sound of artillery in the distance. The Trump administration’s sundering of the Western alliance and its anti-NATO stance have been major catalysts for greater military spending on the Continent.

In Eastern Europe, Russia’s revanchist push into Ukraine has inspired the invaded country’s neighbors to throw open the weapons spigot. Poland boosted defense spending by 31%, Germany by 28%, Romania by 43%, and the Netherlands by 35%.

The Middle East, ever the pressure cooker of geopolitics, raised its military tab by 15%, clocking in at $243 billion in 2024 amid ongoing conflicts in Gaza and southern Lebanon.

Asia? It’s heating up too. Military spending in the region rose 6.3%, its biggest jump since 2009, driven largely by China’s aggressive ambitions and Taiwan’s existential anxieties. Even Latin America got in on the action, with Mexico increasing military spending by 39%.

And then there are the budget busters. Guyana (+78%), Myanmar (+66%), Israel (+65%), Lebanon (+58%), and Zimbabwe (+52%) all dramatically ramped up their defense expenditures, some in response to internal strife, others due to regional insecurities.

As SIPRI reports, the Americas accounted for 40% of global military spending, followed by Europe (26%), Asia and Oceania (23%), the Middle East (9%), and Africa (1.9%).

The numbers are staggering, as this chart shows:

While it’s a tragic commentary on human nature that war remains our most reliable growth industry, investors would do well to acknowledge reality. Until swords are beaten into plowshares, military-themed equities and funds should form a solid core of any diversified portfolio, especially now.

The U.S. Bureau of Economic Analysis reported on April 30 that first-quarter U.S. gross domestic product (GDP) in 2025 shrank by 0.3%, the first contraction since early 2022.

President Donald Trump has called this negative GDP performance the “Biden overhang,” but Trump’s attempt to shift the blame to his predecessor is getting ridiculed on Wall Street. Analysts throughout the political spectrum point to his own administration’s abrupt federal workforce cuts and ham-fisted tariffs as the real culprits.

Consumers, business leaders, and investors are skittish. The fear of inflation, once thought to be yesterday’s worry, is rearing its head again, fueled by those very same tariffs.

Tariffs are a blunt instrument that never seem to hit their intended targets. We tried this before in the 1930s, and it didn’t go well. They worsen inflation, deepen recessions, and heighten geopolitical tensions. The names Smoot and Hawley live in infamy.

So yes, the economic outlook is grim. But here’s the silver lining (if you can call it that): defense spending is effectively recession- and inflation-proof.

A major reason why? In accounting lingo, it’s called “cost-plus”. That’s the pricing model where defense contractors are reimbursed for expenses and guaranteed a profit margin on top. In a world of budget constraints, these contracts are as close to Wall Street nirvana as you’ll find, providing stable, growing revenue regardless of what happens in the broader economy.

Defense spending isn’t cyclical; it’s tied to perceived threats. And every year, those threats appear persistent, despite economic ups and downs.

Even as the Trump administration cuts the military’s civilian workforce, funding for high-end platforms, e.g. stealth bombers, advanced fighter jets, and drone swarms, remains largely untouched. While some political demagogues may rant about a “hollowed-out” military, the Pentagon’s generals are still writing checks, not passing the hat.

A bigger bang for your tech buck…

And let’s not forget, aerospace/defense is a technology play. These are not your grandfather’s bullets and bayonets. Today’s weapons systems involve artificial intelligence (AI), hypersonics, satellite tech, and next-gen avionics. Aerospace/defense is an industrial-tech hybrid, a viable alternative to overly hyped Silicon Valley darlings.

Case in point: Electric vehicle maker Tesla (NSDQ: TSLA), a member of the “Magnificent Seven” tech coterie, isn’t (in my view) a sound investment. Even after its sharp decline this year due to CEO Elon Musk’s political antics, Tesla remains a severely overpriced meme stock.

Read This Story: The Perils of Investing in a Cult of Personality

Aerospace/defense also entails industrial strategy. Nations leverage investments in defense tech as a way to preserve their manufacturing bases and maintain critical skills. That means long-term capital flowing into firms that make sensors, secure communications, autonomous systems, and next-gen guidance software. Many of these military innovations cross over into the commercial sector as “dual use” technologies.

But don’t just chase the obvious names. Mega-cap defense firms may seem safe, but many are fully valued, even after recent tariff-induced market dips. Instead, look to small- and mid-cap names that are more entrepreneurial and have greater room to grow.

These agile small fry often land key subcontracts and have the ability to “move the needle” faster. Avionics companies, in particular, are poised to benefit as global air forces seek smarter, more connected cockpits.

Ike’s warning to the nation…

It’s a strange paradox: in a world we’d all prefer to be more peaceful, the machinery of war continues to churn.

In his 1961 televised farewell address, President Dwight Eisenhower warned Americans against the emergence of a “military-industrial complex,” a term he coined, and yet here we are, nearly 65 years later, witnessing its golden age. Today’s colossal military spending would make even World War II hero Eisenhower blanch.

From the plains of Eastern Europe to the waters off Taiwan, from drone-packed deserts in the Middle East to the fortified borders of the European Union, the international arms bazaar is alive and well.

As recession looms and inflation nips at our heels, there’s only one certainty: defense spending isn’t going anywhere.

And neither should your exposure to it. Here are my recommended high-quality small- and mid-cap defense stocks, along with benchmark exchange-traded funds (ETFs) to track the broader sector.

Small- and Mid-Cap Defense Stock Picks

AeroVironment (NSDQ: AVAV)

• Market Cap: $4.3B
• Focus: Tactical drones, unmanned aircraft systems (UAS), loitering munitions (Switchblade).
• Why it’s compelling: Strong Department of Defense contracts, Ukraine war relevance, expanding into AI-powered defense tech. Diversified into civilian sector work as well.

Kratos Defense & Security Solutions (NSDQ: KTOS)

• Market Cap: $5.3B
• Focus: UAS, satellite communications, directed energy.
• Strength: Robust research & development pipeline and cutting-edge tech.

V2X (NYSE: VVX)

• Market Cap: $1.5B
• Focus: Mission support, training, logistics, and cyber solutions for the U.S. military.
• Why it stands out: Stable contracts, strong integration post-merger (Vectrus + Vertex), and recurring revenue.

BWX Technologies (NYSE: BWXT)

• Market Cap: $10.1B
• Focus: Nuclear components for submarines, aircraft carriers, and reactors.
• Edge: Near-monopoly in naval nuclear reactors; aligned with U.S. Navy modernization.

Ducommun (NYSE: DCO)

• Market Cap: $863M
• Focus: Aerospace and defense components, including electronic systems and structures.
• Bull case: Embedded in next-gen aircraft systems with high switching costs.

Benchmark Funds

iShares U.S. Aerospace & Defense ETF (ITA)

• Net Assets: $6.3B
• Tracks large- and mid-cap U.S. aerospace/defense names.
• Top holdings include behemoths Lockheed Martin (NYSE: LMT) and Northrop Grumman (NYSE: NOC), but ITA also has exposure to smaller players.
• Reasonable expense ratio of 0.40%.

SPDR S&P Aerospace & Defense ETF (XAR)

• Net Assets: $2.5B
• More equally weighted than ITA, offering greater exposure to small- and mid-cap names like AVAV, KTOS, and others. Expense ratio: 0.35%.

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