The global defense landscape is undergoing a seismic shift. NATO’s decision to raise defense spending to 5% of GDP by 2035—a doubling of its 2014 target—has set the stage for a prolonged arms race. At its core, this pivot reflects heightened fears of Russia’s military ambitions, exemplified by its invasion of Ukraine and its growing reliance on asymmetric warfare, including cyberattacks and subsea threats. For investors, the question is clear: Where should capital flow to capitalize on this geopolitical realignment?
The answer lies in three sectors: cybersecurity, undersea infrastructure protection, and defense contractors. These industries are not only critical to national security but also poised for sustained growth as NATO members reallocate trillions to deter Russian aggression.
The Undersea Vulnerability: A Silent Threat
The world’s digital backbone—undersea cables—transmit 95% of global internet traffic and are vulnerable to sabotage. Russia’s navy has been spotted conducting aggressive patrols near critical cables, raising fears of disruption to financial markets, communications, and defense systems. NATO’s inclusion of critical infrastructure protection in its 1.5% defense-related spending mandate creates a direct funding channel for subsea security technologies.
Firms to Watch:
– L3Harris Technologies (LHX): A leader in undersea surveillance systems, including sonar and unmanned underwater vehicles (UUVs). Its SeaHunter drone, designed to detect submarines, is a prime example of tech aligned with NATO’s priorities.
– General Dynamics (GD): Its Bath Iron Works division builds advanced submarines, while its Mission Systems segment develops subsea sensors and communication networks.
Cybersecurity: The Digital Battlefield
Russia’s cyberwarfare capabilities—evident in attacks on Ukraine’s energy grid and NATO member states—demand robust defenses. The $1.5 trillion allocated annually to NATO’s broader defense spending includes cybersecurity, creating opportunities for firms specializing in threat detection and infrastructure hardening.
Key Players:
– CrowdStrike (CRWD): Its Falcon platform detects advanced persistent threats (APTs), critical for defending defense contractors and critical infrastructure.
– Palo Alto Networks (PANW): Its Prisma Cloud secures hybrid cloud environments, vital for NATO’s digital command systems.
Defense Contractors: The Engine of Modernization
The $2.9 trillion annual increase required to meet NATO’s 3.5% core defense target ensures sustained demand for traditional defense contractors. Firms with munition production, air defense systems, and logistics capabilities are front-runners.
Top Picks:
– Raytheon Technologies (RTX): Its Patriot missile system and Iris-T air defense are staples of NATO arsenals.
– Lockheed Martin (LMT): The F-35 fighter program and hypersonic weapons development align with NATO’s need for air superiority.
Risks and Considerations
- Fiscal Sustainability: High public debt in Italy (135% GDP) and France (112% GDP) could strain budgets. However, NATO’s EU arms fund and classified defense planning processes ensure funding flows to priority sectors.
- Geopolitical Escalation: Direct conflict remains unlikely, but the risk of cyber or subsea incidents could accelerate spending.
Investment Thesis
The 5% defense spending target is not just a NATO commitment—it’s a multi-decade tailwind for cybersecurity, subsea tech, and defense giants. With Russia’s threats persisting and NATO’s fiscal levers aligned, investors should prioritize:
1. Subsea/Defense Tech: LHX, GD
2. Cybersecurity: CRWD, PANW
3. Traditional Contractors: RTX, LMT
Act Now: Geopolitical risks are here to stay. Capitalizing on NATO’s spending surge requires a long view—a portfolio anchored in these sectors will weather uncertainty and profit from a world increasingly defined by hard power.
Data as of June 2025. Past performance does not guarantee future results.
