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Geopolitical rifts drive defense theme
Market take
Weekly video_20250623
Catherine Kress
Head of Geopolitical Research & Strategy, BlackRock Investment Institute
Opening frame: What’s driving markets? Market take
Camera frame
Changing geopolitical dynamics and rapid innovation in AI are transforming defense investment. We get granular across sectors and regions.
Title slide: Geopolitical rifts drive defense theme
1: Changing geopolitical dynamics
We see geopolitical fragmentation evolving across three fronts.
First: geopolitical blocs are emerging. We see this in different views on the Ukraine war and alignments with the US and China.
Second: competition is intensifying between those blocs. We see this most clearly in the AI race between the US and China.
Third: supply chains are being rewired to prioritize resilience and national security.
Together, those dynamics are driving investment in defense – particularly in the European Union. After years of underinvestment, many NATO members are expected to increase spending to 5% of GDP.
2: Changing nature of warfare
AI is expected to transform militaries around the world – think, for instance, of the use of drones in Ukraine and the Middle East. And tech supremacy is now seen as a national security priority, particularly for the US and China.
3: Getting selective in defense
We think exposure to defense can help make portfolios more resilient to geopolitical volatility.
In terms of geographies, we find defense stocks in Japan and Korea more attractive, given the price surge for European aerospace and defense stocks this year.
In terms of sectors, we like defense tech and space, where we think a lot of companies could go public in the coming years.
More broadly, we think private markets can play a big role, given the long-term, capital-intensive nature of defense projects and constraints on public funding.
Outro: Here’s our Market take
The rapid evolution of mega forces – including AI and geopolitical fragmentation – is spurring increased defense spending globally. We think certain regions and sectors – like infrastructure, defense tech and space – are better-positioned than others.
Closing frame: Read details: blackrock.com/weekly-commentary
Defense spending rising
The geopolitical fragmentation mega force is evolving, with a big focus now on rising defense spending. We refine our preferences across regions and sectors.
Market backdrop
Oil prices steadied after their surge on the Israel-Iran conflict. US bond yields were little changed after the Fed signaled it was eyeing the impact of tariffs.
Week ahead
We watch the US PCE data for signs of tariff impacts, so far limited in major data. Solid wage growth is keeping core inflation above the Fed’s 2% target.
Geopolitical fragmentation has deepened in the past decade through shocks like the pandemic, Russia’s invasion of Ukraine, fresh conflict in the Middle East and rising trade tensions. A shifting US security posture has accelerated this trend, pushing up defense spending in the EU and Asia – with this week’s NATO Summit set to lift Europe’s further. As the geopolitical mega force evolves, we take an active approach to the theme and get granular across regions and defense exposures.
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Stepping up spending
Defense spending as a share of GDP, historic and projected, 1960-2027
Forward looking estimates may not come to pass. Source: BlackRock Investment Institute, NATO, World Bank, European Commission, July 2025. Note: The solid lines show the defense spending as a share of GDP for Germany and European NATO countries. The dotted lines assume current plans to boost defense spending are realised.
Geopolitical fragmentation and economic competition – a mega force, or big structural shift we’ve long tracked – is rapidly evolving across multiple fronts. First: the emergence of geopolitical blocs, evidenced by different views on the Ukraine war and alignments with the US and China. Second: competition between those blocs, most evident in the US-China AI race. Third: the rewiring of supply chains to build resilience and support national security. Together, these dynamics are deepening geopolitical fragmentation and sparking investment in defense globally. After undershooting for decades, defense spending in Europe has now hit its target of 2% of GDP and is set to rise further. See the chart. Many NATO members are expected to agree to up spending to 5% of GDP after this week’s NATO Summit in The Hague, with an expected 3.5% for defense and 1.5% for defense infrastructure.
Another mega force overlaps with these dynamics: artificial intelligence. Tech supremacy has become a national security priority — particularly for the US and China, where AI leadership is seen as critical to both economic advantage and military superiority. AI is expected to revolutionize how militaries around the world organize and operate. Take the use of drones in Ukraine and the Middle East, for example. We think investors can benefit from exposure to defense, meaning companies and industries directly or indirectly involved in products, services or capabilities supporting a country’s defense infrastructure. Such exposures can be a source of portfolio resilience, in our view, especially in periods of heightened geopolitical volatility.
Getting granular within defense
Yet we’re selective about which geographies and sectors we prefer to express the defense theme. Across regions, we eye opportunities in Europe as defense and infrastructure investment ramps up. Yet we stay selective for now given the over 60% surge in its aerospace and defense sector this year, according to LSEG data. Defense stocks in Japan and Korea look more attractive, in our view. We also favor the US: it spends more than double on defense than Europe, SIPRI data shows. And it is home to the most advanced defense and defense tech firms. Many countries source key systems — especially air and missile defense — from US suppliers. Among sectors, we see opportunities in defense tech. That includes not just AI and software companies, but also IT services and hardware like semiconductors that enable advanced technologies. We think many private companies in defense tech could launch initial public offerings (IPO) in coming years, allowing investors to tap this theme through public markets. We also like space tech, which we think could benefit as strategic competition intensifies.
In private markets, we see both near- and long-term opportunity, especially in infrastructure. Private markets are well suited for the capital-intensive, long-term nature of defense and infrastructure projects. Private markets can also fill in the gaps created by constraints on public funding that make it more difficult to get large infrastructure projects over the line without external funding. That is especially the case as worries about government debt and fiscal deficits mount.
Our bottom line
Growing geopolitical fragmentation and strategic competition in AI are reinforcing the global focus on national security and resilience – creating opportunities in defense. But as both mega forces evolve, they call for a selective approach.
Market backdrop
Oil prices added to gains to be up about 10% to near $75 a barrel since June 12 on concerns about potential energy supply disruptions as the conflict between Israel and Iran persisted. Stocks moved sideways, with the S&P 500 ticking down. US 10-year Treasury yields were also mostly steady near 4.40%. The Federal Reserve kept policy rates unchanged, as expected. We still see a tight labor market and the eventual impact of tariffs limiting the Fed’s scope to cut rates.
We watch US PCE data for signs of tariffs feeding through to consumer prices. Inflation data has been noisy since the pandemic, with big month-to-month swings making it difficult to draw conclusions. Wage growth has remained elevated, likely preventing inflation from settling at the Federal Reserve’s 2% target. We also watch early surveys for June activity to gauge how tariffs are impacting global manufacturing sentiment.
Week ahead
Past performance is not a reliable indicator of current or future results. Indexes are unmanaged and do not account for fees. It is not possible to invest directly in an index. Sources: BlackRock Investment Institute, with data from LSEG Datastream as of June 19, 2025. Notes: The two ends of the bars show the lowest and highest returns at any point year to date, and the dots represent current year-to-date returns. Emerging market (EM), high yield and global corporate investment grade (IG) returns are denominated in US dollars, and the rest in local currencies. Indexes or prices used are: spot Brent crude, ICE US Dollar Index (DXY), spot gold, MSCI Emerging Markets Index, MSCI Europe Index, LSEG Datastream 10-year benchmark government bond index (US, Germany and Italy), Bank of America Merrill Lynch Global High Yield Index, J.P. Morgan EMBI Index, Bank of America Merrill Lynch Global Broad Corporate Index and MSCI USA Index.
June 23
Global flash PMI
June 26
US durable goods
June 27
US PCE; Japan unemployment
Read our past weekly commentaries here.
Meet the authors
Jean Boivin
Head – BlackRock Investment Institute
Wei Li
Global Chief Investment Strategist – BlackRock Investment Institute
Catherine Kress
Head of Geopolitical Research & Strategy – BlackRock Investment Institute
Simon Wan
Portfolio Manager – BlackRock Multi-Asset Strategies and Solutions
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Past performance is not a reliable indicator of current or future results. It is not possible to invest directly in an index. Note: Views are from a US dollar perspective. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast or guarantee of future results. This information should not be relied upon as investment advice regarding any particular fund, strategy or security.