Investment Review №341. The Obvious and the Unbelievable

With President Trump returning to office, the shift toward a multipolar world clearly accelerated in 2025. The trend has gathered further momentum in 2026 amid military action in Venezuela, discussions around acquiring/capturing Greenland, and—most critically—operations in Iran. These developments risk longer-term consequences, including a potential multi‑month closure of the Strait of Hormuz, through which roughly 20% of global oil and gas exports pass. By 2026, global fragmentation appears entrenched: Trump is often a key catalyst, but many of the processes he set in motion now have their own momentum and are likely to persist regardless of his decisions. For investors, this argues for incorporating the theme into portfolio structure, with an allocation to the defense sector.

Global military spending has risen steadily over the past decade, reaching $2.7tn in 2024. Trump has proposed lifting the Pentagon budget to $1.5tn—about a 50% increase. All 32 NATO members are boosting defense outlays, and the alliance GDP target has been raised to 3.5% by 2035. After decades of underinvestment (an estimated $985bn shortfall), Europe has launched the $930bn “Rearm Europe” program. Germany has earmarked $125bn for defense in 2026 (+25% YoY) and aims to reach 3.5% of GDP—about $185bn—by 2029. On current trajectories, global military expenditure is on track to exceed $3.5tn by 2030.

The iShares U.S. Aerospace & Defense ETF (ITA) was up more than 4% YTD as of March 24 amid the conflict with Iran, outperforming the S&P 500, which was down nearly 4%. The move reflects not only geopolitics but also fundamentals: Northrop Grumman (NOC) reported a record $95.7bn backlog and a 20% increase in international sales, while RTX Corporation (RTX) guided to $96.3bn in 2026 revenue (+5% YoY), which may prove conservative. The top five U.S. prime contractors are set to raise capex by 38% this year.

A more diversified approach would be to allocate to the iShares U.S. Aerospace & Defense ETF (ITA), which tilts toward large-cap companies, or the SPDR S&P Aerospace & Defense ETF (XAR), which offers broader exposure to mid-cap names. For a targeted play on “new defense”—drones, AI, and cybersecurity—the Global X Defense Tech ETF (SHLD) is a good fit: holdings have delivered 29% YoY earnings growth, nearly twice the pace of the S&P 500. For European exposure, consider the Themes Transatlantic Defense ETF (NATO) or the Select STOXX Europe Aerospace & Defense ETF (EUAD).

Valuations have expanded after a strong rally, so adding on pullbacks is preferable to chasing headlines. Even so, the sector’s long-duration contracts and the strategic imperative to rearm make it relatively resilient across political cycles and a credible candidate for a permanent portfolio allocation.