Episode Description:
Defense investing is rapidly moving from the margins to the center of capital markets as geopolitical fragmentation, rising global tensions, and technological innovation reshape how nations allocate resources. What was once viewed as a niche or even overlooked sector is now emerging as a critical pillar of global infrastructure and security.
In this episode of The Bid, host Oscar Pulido sits down with Rolf Heitmeyer, Head of Industrials in BlackRock’s Fundamental Equities Group, to explore the forces driving this shift in defense investing. They discuss the surge in global defense spending, the changing competitive landscape between incumbent contractors and new entrants, and how innovation—from AI-enabled systems to low-cost drones—is transforming modern warfare.
As geopolitical megaforces continue to evolve and technology reshapes security priorities, defense investing is becoming an increasingly relevant theme for investors seeking to understand the intersection of global politics, innovation, and markets.
Key moments in this episode:
• Introduction
• Geopolitical fragmentation and rising defense spending
• Industry structure: incumbents vs new entrants
• Innovation and the rise of attritable weapons
• AI and the future of defense systems
• Scaling production and supply chain challenges
• Defense investing in capital markets
• Long-term outlook and defense supercycle
• Key takeaways
Keywords: Defense investing, capital markets, AI investing, megaforces, geopolitical risk, stock market trends, defense technology
Sources: 'Venture capital investment in defense tech surges while M&A activity slows' S&P Global March 2026; 'Over 11,000 munitions in 16 Days of the Iran War: ‘Command of the Reload’ Governs Endurance' RUSI, March 2026; Department of War Statistics; Data from BlackRock Fundamental Equities as of April 2026.
This content is for informational purposes only and is not an offer or a solicitation. Reliance upon information in this material is at the sole discretion of the listener. Reference to any company or investment strategy mentioned is for illustrative purposes only and not investment advice. In the UK and non-European Economic Area countries, this is authorized and regulated by the Financial Conduct Authority. In the European Economic Area, this is authorized and regulated by the Netherlands Authority for the Financial Markets. For full disclosures, visit blackrock.com/corporate/compliance/bid-disclosures.
Oscar Pulido: Over the past few years, investing in the defense sector has moved from the periphery of markets to a more central focus for investors rising geopolitical tensions, shifting global alliances and rapid advances in technology from drones to artificial intelligence are reshaping how nations think about security and how capital is being deployed. But as the landscape evolves, so do the questions around growth. Risk and what this means for portfolios. So how is the defense sector evolving, and what should investors understand about this new era of defense investing?
Welcome to The Bid where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm Oscar Pulido.
Today, I'm joined by Rolf Heitmeyer, Head of industrials in BlackRock's Fundamental Equities Group. Together we'll explore what's driving the growing focus on defense investing, how innovation is reshaping the industry, and what investors should consider as this space continues to evolve.
Rolf, thank you so much for joining us on The Bid.
Rolf Heitmeyer: It's great to be here, Oscar. Thanks for having me.
Oscar Pulido: Rolf, today we're talking about the defense industry, and the spending that is going on globally towards the defense industry. And this is actually a pretty appropriate topic because one of the themes that we have talked about on The Bid, over the last couple of years. Geopolitical fragmentation. It's one of these mega forces that the BlackRock Investment Institute has identified. So given this rise in geopolitical fragmentation and just geopolitical tensions, talk about how this has affected global defense spending.
Rolf Heitmeyer: Sure. There's really been a dramatic change in the landscape over the last, call it five years. The obvious reason is that there's been a huge increase in geopolitical tension and unfortunately the outbreak of numerous active military conflicts around the globe. But, maybe less obviously, there's also been an increasing amount of geopolitical fragmentation, which has resulted in a new era of military superpower competition, which we really haven't seen since the Cold War. All this has led to a big increase in military spending.
So, in 2026, the enacted US budget for military equipment and R&D was 60% higher than it was five years ago. And if you look internationally, the growth there has been even faster as a lot of countries catch up to under investment in the past. And as Larry Fink mentioned in his most recent annual letter, one of the key themes he sees is that the world is increasingly reorganizing around self-reliance, and that is nowhere more obvious than in defense.
Apart from just spending more on defense, countries are also really focused on becoming independent in terms of the industrial base for their militaries. And that goes deep into the supply chain. So, it's not just the final product. Countries are more and more interested in securing the critical components that go into defense, programs such as semiconductor chips or rare earth materials. So apart from just the fundamental changes in the industry though, what I've also observed is a dramatic sentiment shift. Five years ago, I would say there was a bit of complacency about the very need for defense spending. I think the sector was a bit overlooked and viewed as undesirable by some. That has dramatically changed. So, now I would categorize the common view as more of a view that the defense industry is really essential infrastructure, so just absolutely necessary for the preservation of stable democracies and world order.
Oscar Pulido: So, there definitely has been a sentiment shift towards the defense industry, which you touched on, and I think you said that in the US, 2026 budget, the defense spending is 60% higher than it was five years ago. So, there's certainly an order of magnitude difference here. What does this mean and this increased capital investment mean for companies in the defense sector?
Rolf Heitmeyer: Yeah, maybe I'll talk about where we are and then where we're going. So, currently the industry is quite consolidated. In the US for example, there are five large US defense prime contractors. They're called the primes. And, they’re really the dominant incumbents in this space. And so, what they urgently need to do is one, increase capacity. So, there's a shortage of a lot of critical weapons, and they need to invest a lot of capital to increase capacity. What they also need to do is coordinate a very complex supply chain. In defense there's a very unwieldy, complex, far flung supply chain that all needs to be corralled to effectively increase throughput. But beyond just producing more stuff, what the incumbents need to do is do it more efficiently. So, over time, I think misaligned incentives and just general corporate bloat have resulted in an industry that is not as nimble and cost efficient as it needs to be. A lot of the production processes are also out of date.
So, these are, real shortcomings that the industry needs to address. But the other big change is that there's a huge inflow of new competition. There are a lot of startup startups entering the space that are offering innovative solutions faster and at lower cost. And all of that has attracted a lot of capital. So, if you look at venture capital investment in the US that went into defense tech in 2025, it was up almost 300%, versus five years prior. So just in terms of the big industry structure here, from the early 1990s to the present, we went through a period of consolidation, and now I think there's a big inflection we're entering where we're entering a period of deconsolidation as these new entrants come into the picture.
So, the incumbents will face disruption, they'll have to adapt, but I think they're still vital in the ecosystem, particularly as integrators of large and mission critical platforms. And the market overall is growing, so I think the incumbents and the new entrants have an opportunity to succeed, but there will be winners and losers.
Oscar Pulido: There's definitely some big percentage numbers that you're mentioning. We talked about the 60% increase in defense spending in the US compared to five years ago, and then you also mentioned a 300% increase in venture capital firms spending and identifying opportunities in this industry. You also talked about there's some incumbents, maybe they're not as nimble. There's some processes that need to be updated. There's some new entrants. So, talk a little bit more about how innovation is reshaping this battlefield, I guess we could say.
Rolf Heitmeyer: Sure. Oscar, you've touched upon a really critical issue here. In every military conflict, there are new lessons learned, which serves as a catalyst for change. And one of the big developments in recent conflicts has been the rise of attritable weapons. So, that's a key term we should probably focus on a bit. What are attritable weapons? These are low cost, mass produced, almost always unmanned weapons. They are lower cost because they often use commercially available, inexpensive off the shelf components. They're also usually engineered to be just good enough. Not perfect. So as such, they're expendable in large quantities and they're effective because they effectively overwhelm an enemy with sheer volume. So, they win by attrition, which is the root of the word attributable.
Ukraine is a prime example. In Ukraine, the advent of low-cost drones has really come into play. In Ukraine, these low-cost drones have totally taken over the battlefield in the way that has made a lot of legacy weapon systems obsolete or close to it. Just to drive this point home, the opposite of attritable is what is now often called 'exquisite'. So 'exquisite' weapons are top of the line, more capable on an individual basis, but much more expensive to make - much, much more complicated to make - and therefore producible only in much lower quantities. And it's important to note that the US has mostly exquisite weapons.
So, this presents, a major problem. In recent conflicts, the US and allies have been, attacked with low-cost drones that are mass produced and often cost on the order of $50,000. Those are being shot down with missiles like the Patriot Missile that cost $4 million apiece and just, and by the way, oftentimes more than one Patriot missile is used to shoot down one incoming threat as a fail-safe.
You can do the math, it's wildly asymmetric, economically and unsustainable. But, more than just the economics, the volume is unsustainable. So, to give you a revealing stat, in the first 16 days of the current Iran War, US and Allies used about 1,800 Patriot missiles that equates to almost three years of production at current rates. So, there's a fundamental problem with what is called 'magazine depth' by military people, said another way - running out of ammo.
Oscar Pulido: Rolfe, one of the words you used, which I think was very appropriate, was asymmetric. Because you just described two different approaches to defense spending and defense strategy. Remind me the two words again. You said attritable?
Rolf Heitmeyer: Attritable and exquisite.
Oscar Pulido: And attritable is lower cost, more mass produced, but it seems to be holding its own against the more exquisite weapon production and being able to produce things at scale seems like an important part of defense strategy. And so, you touched on that earlier before, which is, can the system actually keep up with demand? And how well positioned is this defense industrial base to adapt to this need to scale production?
Rolf Heitmeyer: Currently, plainly put, the system is absolutely not capable of keeping up with demand. So, the first priority is producing more of the current high-end weapons that are in production, and there's real action being taken there.
For example, the US Department of War has been entering into unusually large and contracts to increase the product, the production of certain missiles. and that is meant to give the defense, companies, greater confidence and visibility so that they can invest large amounts of capital to increase production.
They're also investing a lot in modernization. So currently there are some big bottlenecks that are holding a holding up production. To give you one example of solid rocket motors, these are in very short supply. Partially because they have outdated methods of technology that haven't changed since World War ii.
So, that is urgently being addressed. And with all this, the plan is to increase the production of key missile interceptors, like the Patriot by 200-300% by the early 2030s. And that the fact that it's taking until the early 2030s gives you a sense as to how difficult this problem is. From a logistical standpoint, I can assure you that the military would like to increase production much faster than that.
Oscar Pulido: Right, because there's a lot happening in the world and a lot of geopolitical fragmentation that is happening right now. So, certainly scaling that production and innovating faster must be a key point that, the defense department, not just in the US but in other countries, are also thinking about.
And Rolfe, you recently spent time on an aerospace and defense company tour where you were able to meet with a number of new and emerging companies in this defense space. I'm curious what stood out from that experience and how are these startups changing, the pace and cost of innovation compared to some of the more traditional and incumbent firms?
Rolf Heitmeyer:. So, what we recently did was we went to Los Angeles and we arranged a multi-day tour with many different, aerospace and defense startups. And Oscar, the first takeaway is, first of all, it was mind blowing to see how much innovation is happening there. Just in this one city, there were dozens of companies that are raising significant amounts of venture capital, attracting the best and brightest engineers. Really solving a lot of these challenges. So, beyond just making more of the current exquisite weapons that we have, we need new weapons. And that's where these, new startups come into play. And I can just give you a little bit of an overview of what's going on there.
First and foremost, people are developing attributable weapons to fight fire with fire, so to speak. Companies are developing weapons at lower cost, higher scale that solve some of the asymmetries that we've touched upon in our conversation. There are also entirely new categories of weapons that, that attempt to solve this issue in different ways. For example, directed energy weapons. So, instead of using a traditional projectile to shoot down an incoming threat. If these weapons may shoot it down with a laser, or they may shoot down entire swarms of incoming threats with fields of electromagnetic energy. So, the key benefit here is that with directed energy weapons, you never run out of ammo unless you have power or you never run out of ammo as long as you have power.
Along the same lines, we saw companies that are pursuing advancements in electronic warfare, so countering threats through jamming. And then another fascinating and promising area of innovation is command and control. So, in a modern battlefield, there's a vast amount of data that is collected. It's a real challenge to analyze that. You can use it to increase situational awareness and enhance decision making for the military personnel in the theater. And something like missile defense is extraordinarily complex. You have to first detect the target, then track it, and then intercept it. And that requires the coordination of many different assets, on land, in the sea, in air, in space and AI-enabled command and control systems are becoming much more intelligent at coordinating all of this. So, you can envision a future where there's a system that's smart enough to see an incoming threat, recognize it as, let's say, a low-cost, slow-moving drone. And take it out with a commensurately low-cost interceptor, saving the irreplaceable, exquisite weapons for more high-end threats.
Oscar Pulido: And I'm glad you mentioned AI because as you were talking about the startup companies that you met on this tour, it definitely sounded like a much more modern and somewhat futuristic way of conducting your defense strategy as opposed to maybe what we more traditionally think about. And we've talked a lot of guests on The Bid about artificial intelligence and the effect that it's having on industries and sectors across the economy. And it sounds like defense is no different.
Maybe we can pivot to talk about, defense from the lens of an investor and in their portfolio. What makes defense companies different in terms of growth, stability, risk in a portfolio, and why is this becoming more relevant for how portfolios are positioned today?
Rolf Heitmeyer: Yeah. I think probably the biggest different differentiator that I would call out is the fact that defense companies are dependent on defense budgets, and defense budgets are totally uncorrelated with the macro economy.
So, the main driver of defense budgets is the threat environment. If the threat is high enough, the defense spending will increase regardless of pretty much everything else. So, that makes the defense sector really uncorrelated with a lot of other industries that are macroeconomically sensitive. So, for that reason, defense investments can provide a good source of diversification in a portfolio. I would also, make the general point that historically, at least in the US, these have been pretty good businesses. The returns on capital have been solid. Oftentimes these companies have a lot of visibility with respect to revenue and earnings growth just due to the long-term nature of military programs and the credit worthy nature of the buyer, the US government.
Also, there's a unique element to this, space in that the government has a vested interest in maintaining a solid, strong industrial base and that sort of non- economically motivated support is really not evident in most other industries.
Oscar Pulido: And Rolf, when you think about the defense industry and the defense industrial investing space, we've talked a lot about what you're seeing currently, but if you were looking ahead and trying to think a little bit more about the future, what do you think investors are under appreciating about this space today?
Rolf Heitmeyer: One thing that comes to mind is just the duration of the cycle. So, let's say in a best-case scenario, all active conflicts ended tomorrow. If that were the case, we would still have to massively ramp production. A lot of these key weapons just to backfill the depleted inventories from recent conflicts.
In addition, we would have to increase the buffer stocks necessary for the modern reality of conflicts that require far more of these munitions. so I really view this as a longer-term super cycle as opposed to a shorter-term cycle, which we've seen in defense in the past.
Oscar Pulido: The shorter-term cycle, I think people are reading the headlines. We're seeing conflicts in many parts of the world and the Middle East in particular. But you think, again, this spans many years out in the future that there is just a longer-term need for governments to keep increasing their defense budgets.
Rolf Heitmeyer: Absolutely. This is not a short-term trend.
Oscar Pulido: Rolf this has been interesting because this topic has fused together a lot of different things that we've talked about on The Bid. We talked about geopolitical fragmentation and how that is a longer-term trend. We talked about AI and innovation, which has definitely been a persistent theme for us, and you also mentioned how defense can be non-correlated potentially in a portfolio because the sources of the revenues and the contracts for these companies are less tied to the broader macroeconomic landscape. And certainly investors are looking for diversification in their portfolios in every which way they can get it.
So, Rolf, thanks for bringing all those things together in this conversation, and thank you for doing it here on the Bid.
Rolf Heitmeyer: Thanks so much for having me.
Oscar Pulido: Thanks for listening to this episode of The Bid. If you've enjoyed our conversation, check out our episode on Geopolitics Live from Davos. Where we consider how world powers are responding to a shifting global order and make sure you subscribe to The Bid wherever you get your podcasts.
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