Global Defense Budgets Reach Record $2.9 Trillion Amid Rising Geopolitical Tensions
Global defense spending reached an unprecedented $2.9 trillion in 2025, driven by ongoing geopolitical conflicts and strategic military modernization across Europe and the United States, according to a new Deutsche Bank study.
Global defense budgets reached an unprecedented $2.9 trillion in 2025, accounting for 2.5% of global GDP following 11 consecutive years of growth, according to a new study by Deutsche Bank. The research reveals that the combined revenues of the world's top 100 aerospace and defense companies surpassed the $1 trillion threshold last year for the first time, while net profits surged by 46% to a record $124.4 billion.
Markus Müller, Chief ESG Officer and Head of the Global Investment Office at Deutsche Bank, projects that based on the 4.7% compound annual growth rate seen over the past five years, international defense spending will reach approximately $3.5 trillion by 2030 and exceed $4.4 trillion by 2035.
While Stockholm International Peace Research Institute data shows the United States maintains the world's highest defense budget at $954 billion, far outpacing China at $336 billion and Russia at $190 billion, Müller emphasizes that Europe serves as the primary engine of global growth. The European Union's Readiness 2030 initiative aims to mobilize over 800 billion euros in defense investments by 2030, encompassing air defense, drones, and cybersecurity, alongside NATO's target for members to allocate 5% of GDP to defense by 2035.
Evolving Threat Landscapes and Technology
Recent geopolitical conflicts have fundamentally reshaped military expenditures, moving beyond simple budget increases to prioritize specific technological capabilities. Müller noted that Russia's invasion of Ukraine forced a comprehensive reassessment of European defense readiness and deterrence, while Middle Eastern conflicts exposed critical vulnerabilities in infrastructure, energy supply routes, and asymmetric threats.
Consequently, governments are channeling funds into missile defense, unmanned aerial systems, ammunition, real-time intelligence, surveillance, reconnaissance, and command-and-control systems. Deutsche Bank highlights that Ukraine signed over 7 billion euros in drone procurement contracts in the first half of 2026 alone, with the global military drone market projected to expand from roughly $17 billion in 2025 to over $50 billion by 2035.
Dispelling Bubble Concerns and Israeli Advantage
Addressing market valuations, Deutsche Bank analysts argue that the massive expansion in defense equities is not a speculative bubble but a sustained structural shift. This outlook is reinforced by the proposed US defense budget for 2027, which aims to approach $1.5 trillion, driven heavily by high ammunition consumption during operations involving Iran.
Furthermore, Israeli defense manufacturers hold a distinct competitive edge due to their battle-tested reputation, known as 'combat proven'. Recent major strategic transactions, such as Greece acquiring three air defense systems from Rafael Advanced Defense Systems and Israel Aerospace Industries for 3.1 billion euros, underscore the global demand for field-validated military hardware.
Looking toward the future, Deutsche Bank maintains a positive long-term outlook for European aerospace and defense firms, projecting an annual earnings-per-share growth of approximately 20% between 2026 and 2028, significantly outpacing the broader European equity market.
