A NATO-rious trade

The NATO summit is officially in session, as President Trump joins leaders from all 32 member countries in Ankara, Turkey to tackle some of the alliance’s biggest security challenges.

High on the agenda: Russia’s war in Ukraine after Kyiv launched one of its deepest drone strikes yet into Russian territory last night; Europe’s efforts to shore up defenses amid shrinking US military support; and a lasting peace agreement between the US and Iran.

But for Trump, who told reporters he has been “very disappointed” with the alliance, one of the biggest problems is defense spending—and for investors, it may be one of the biggest opportunities.

Defense stocks take flight

Last year, NATO members agreed to raise defense spending to 5% of GDP by 2035, up from the previous 2%, but Trump wants allies to accelerate that timeline.

That prospect is lifting defense stocks. Goldman Sachs’ basket of European defense stocks has climbed to its highest level in more than a month as investors bet that faster military spending will translate into larger weapons orders. Since Russia invaded Ukraine in 2022, Goldman’s group of European defense stocks—such as BAE Systems and Rheinmetall—has surged roughly 500%, including a 90% gain last year after NATO agreed to the higher spending target.

Drone makers could also be among the biggest beneficiaries. Low-cost unmanned aircraft have become increasingly central to modern warfare, putting companies such as AeroVironment, Aevex, Red Cat Holdings, and Swarmer in the spotlight. In fact, William Blair estimates the US market for lower-cost drones could reach $100 billion annually.

The next challenge

The deals are already starting to roll in. NATO announced it will buy up to 10 surveillance aircraft from Swedish defense company Saab in a deal Bloomberg estimates could be worth roughly $5 billion. Secretary General Mark Rutte also said four European countries will jointly purchase up to five high-altitude drones from Northrop Grumman.

For investors, though, the bigger question is execution. Governments continue to pledge record defense spending, including Trump’s proposed $1.5 trillion defense budget for fiscal 2027—about 50% larger than the current year’s budget. But defense companies still face labor shortages and supply-chain bottlenecks that have slowed production, making it harder to turn growing order books into revenue as the next battlefield shifts to the factory floor.—SY