Defence-related ASX shares surged in 2025 as investors anticipated sustained growth in global military spending.
This increased spending came amid heightened geopolitical tensions and evolving security threats.
Governments across Europe, the United States, and the Indo-Pacific committed to larger defence budgets. This was in response to ongoing conflicts, strategic competition, and the increasing importance of national security.
This supported expectations of stronger demand for defence equipment, cybersecurity, surveillance systems, and advanced military technologies.
Investors were also attracted by the sector's defensive characteristics. Many defence companies operate under long-term government contracts that provide relatively stable revenues.
However, over the last six months, this sector has cooled off as investors have largely exited their positions.
This has come despite continued defence investment from governments.
A new Betashares report outlined the major reasons for these trends and explored what might come next for the sector.
Image source: Getty Images
Soft Q2
According to the report from Betashares, global defence has been one of the market's standout themes in recent years. This has been powered by a structural step-up in spending across NATO and its allies.
Yet after a strong run, defence stocks have fallen over 2026, even as the spending story has grown stronger. Contractor order books have pushed past US$1 trillion for the first time, and the conflicts in Ukraine and Iran continue to reinforce the case for sustained investment in defence.
The quarter's defining theme was a shift in the type of defence spend. Conflicts in Ukraine and now Iran are increasingly being fought with cheap, mass-produced drones rather than expensive fighter jets and large missile programs. That has investors reassessing the traditional primes, and rotating toward autonomy, AI and space.
Much of the recent softness has come from Europe, where valuations have reset after last year's surge.
Continued investment
Despite the market pause, the spending backdrop only strengthened.
According to the report, at the recent NATO Summit (Ankara) members were pressed to deliver "clear, concrete and credible" plans toward the new 5% of GDP target, with the alliance already averaging roughly 4% just one year in.
Over €50 billion of new procurement was announced, alongside a "NATO Drone Edge" initiative to invest US$40 billion in uncrewed systems over five years.14
In the United States, Congress approved over US$1 trillion for 2026, and the FY27 budget proposes a record US$1.5 trillion (a ~40% increase), including US$53.6 billion for a "Drone Dominance" program.
The clear message from the quarter is that spending continues to ramp to record levels, but the target of that spend is shifting toward cheaper, nimbler, technology-led solutions. For long-term investors, the pullback has reset valuations in a sector with multi-year earnings visibility and growing relevance as a geopolitical hedge.
Profit taking
Despite the increased government spending, it appears that investors are now rotating into other sectors.
The Betashares Global Defence ETF – Beta Global Defence ETF (ASX: ARMR) has now fallen 20% since January.
However for investors looking to buy the dip, ARMR remains well placed to capture shifts in the landscape.
It has globally diversified defence exposure holding 60 leading companies which derive 50% or more of their revenues from the development and manufacturing of military and defence equipment, as well as defence technology.
It currently holds 13 of the top 20 defence contractors in the world by defence revenue.
