Investing in a new geopolitical era

The world is in a new geopolitical and technological era. The fallout from global events, shifting political alignments, artificial intelligence, and other forces could be creating an inflection point with meaningful implications for investors. Here’s how investors can think about the aerospace and defense industry, which has come back into focus in recent weeks.

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.

At the juncture of commerce and defense

While the public sector can capture headlines for these industries, they live at the nexus of both the public and commercial sector. Consequently, investors exploring aerospace and defense companies should be monitoring what’s driving earnings in the commercial space as well.

Rising fleet utilization and growth, along with consistent growth in both global passenger and cargo demand, has underpinned the civil aerospace earnings.

“Long term, the primary aim of my fund is to capture earnings growth in civil aerospace—basically whatever airlines need to get people in the air,” Haggerty says. “The companies serving both civilian and military companies and contractors are pulling on the same supply chain. Capacity is the new capability, so to speak, and so that’s a big part of the reason why I have been overweight aerospace suppliers.”

Examples of civil aerospace companies in this sector include GE Aerospace (), RTX Corp (), Boeing (), Howmet Aerospace (), and Heico ().

Aerospace and defense investing

It’s common for many aerospace and defense stocks to rally when conflicts flare up—as they did when the confrontation with Iran began—and for them to give back some of those gains when tensions taper off. Investors should exercise caution in assuming that conflicts provide a favorable backdrop for many of these companies.

In addition to several aerospace and defense stocks trading near record high valuations based on price to free cash flow, Haggerty notes that disruptions to global air travel can be a headwind for these companies. He also notes the drag that persistently high oil prices could have on overall economic activity, which could cut into the earnings engine behind civilian air travel. “And there is always political uncertainty to monitor for these industries,” according to Haggerty.

But aerospace and defense companies are broadly positioning to ramp up production. And looking beyond current conflicts reveals industries with momentum in this new geopolitical era.