The Mindset of War

The Mindset of War

A White Dove Among the Bombs

The inspiration for this Take came from Simon Kuper's (Financial Times) article on "How war became contagious."

Brenda* called me last week to ask why we weren't dropping more bombs. I rolled my eyes and explained that I am her advisor—I do not have a job at the Department of Defense, so I do not control when bombs are dropped. I referred her to Kuper's article. It was well-written, short enough to keep her attention, and outlined the facts behind the military-industrial complex. With recent headlines about Greenland, I was curious to see the actual facts behind the "war" industry as opposed to the constant noise.

The aerospace and defense sector has emerged as one of the most compelling investment themes of the past two years. Driven by rising global tensions, unprecedented military spending, and technological transformation, this sector offers both growth potential and portfolio diversification.

Historical Context

The term "military-industrial complex" was popularized by Eisenhower in his1961 farewell address. A former general and Supreme Allied Commander, he warned about the self-reinforcing relationship between the military establishment, the defense industry, and the political interests that support spending. Defense contractors benefit from contracts, military leaders from larger budgets, politicians from jobs in their districts. This dynamic remains relevant and helps investors appreciate both the opportunities and ethical considerations in defense investing.

Since the 1990s, prime contractors for the Department of Defense have declined from 51 to just five: Lockheed Martin, RTX Corporation, General Dynamics, Boeing, and Northrop Grumman.? This consolidation created high barriers to entry and relatively predictable revenue streams.

The New Geopolitical Reality

The global security environment has fundamentally shifted. We've moved from one of the most peaceful eras in modern history—2005 recorded the fewest armed conflict deaths since WWII—to a dramatically different landscape. Last year saw 61"state-based conflicts," the most since 1946.? As Steven Everts of the EU Institute for Security Studies put it: "The norm that you can't use violence to solve political conflicts faded. And it's contagious."?

The numbers reflect this. Global military expenditure reached $2.72 trillion in 2024—an all-time record and a 9.4% year-over-year increase, the steepest rise since the ColdWar.? Spending has risen for ten consecutive years, up 37% since 2015.? Russia surged 38%, Germany 28%, Israel 65%.? At the June 2025 NATO Summit, all 32members (except Spain) agreed to increase defense spending to 5% of GDP by2035—more than doubling the previous 2% target. 4 Fully implemented, this adds roughly $1 trillion annually to NATO's collective defense resources. 5

The Drone Revolution

Beyond spending, warfare itself is changing. In 2018, there were barely 1,000 drone-related deaths worldwide. Today, drones account for roughly 70% of deaths in the Ukrainian war.? Ukraine aims to produce 4.5 million drones this year.?Researchers note that engineers in Myanmar "can build drones for rebels from a cave using 3D printing, parts scavenged from Chinese commercial drones, and knowledge gained from online chat rooms."? For investors, this creates opportunities in drone technology, counter-drone systems, AI-enabled defense, and cybersecurity.

Investment Vehicles

For most investors, ETFs provide practical diversified exposure. iShares U.S. Aerospace &Defense (ITA) is the longest established, tracking approximately 38 domestic companies. SPDR S&P Aerospace & Defense (XAR) uses modified equal-weighting, reducing concentration risk. Invesco Aerospace & Defense (PPA) has delivered roughly 17.2% annualized over the past decade. 8 Global XDefense Tech (SHLD) focuses on military hardware and includes European firms like Rheinmetall and Thales, posting 66% annualized returns since its 2023inception.6

Among contractors, Lockheed Martin leads with $71 billion in 2024 revenue and a record $160.6billion backlog. Emerging players are gaining ground—SpaceX rose from #53 to#28 in defense rankings, while Palantir and Anduril cracked the top 100.??

Investment Considerations

The sector offers high revenue visibility through long-term contracts and counter-cyclical diversification. Key risks include valuation (roughly 27x forward earnings versus 19x for the S&P 500),?? program execution risk from cost overruns, and political shifts in procurement. Some investors have ethical concerns that should be weighed within individual values.

As Kuper concludes: "Normlessness is the historical norm in international affairs. After a brief happy aberration, it's back."? For investors, this creates both opportunities and responsibilities. As always, discuss significant portfolio changes with your advisor.

*Brenda is a fictional person. Not an actual client.