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A sweeping new defense spending pledge from NATO could nearly double the market for U.S. defense contractors over the next decade, says BTIG analyst Andre Madrid.
At last week’s NATO summit in the Netherlands, member nations, excluding Spain, agreed to raise defense spending to 5% of gross domestic product by 2035, up from the prior 2% target. Of that, 3.5% is earmarked for core defense areas like equipment, personnel and operations, while the remaining 1.5% would support infrastructure and defense industrial capacity.
In a July 2 report, BTIG’s Madrid estimates that NATO defense budgets could rise to $3 trillion annually by 2035, with as much as $8.8 trillion in collective military equipment spending over the next decade if current spending patterns hold. For U.S. defense companies, this represents a $2.7 trillion export opportunity, nearly double the $1.4 trillion potential if spending had stayed at 2% of GDP.
“The higher defense pledge could nearly double the addressable market for U.S. contractors,” Madrid wrote.
U.S. firms currently account for roughly two-thirds of European military equipment imports, a share BTIG expects to hold steady. Within BTIG’s coverage, Madrid highlighted AeroVironment (NASDAQ:AVAV), Leonardo DRS (NASDAQ:DRS) and Northrop Grumman (NYSE:NOC) as well positioned to benefit, with Buy ratings on each.
The existing 2% defense spending pledge, introduced in 2006 and reinforced in 2014 after Russia’s first invasion of Ukraine, gained new momentum following the 2022 escalation of the war. As of 2024, 23 NATO members meet the 2% target, with nearly all expected to comply by 2025.
The United States currently contributes two-thirds of NATO defense spending, far outpacing other members such as Germany and the U.K. NATO allies collectively spend $1.5 trillion annually on defense, a figure Madrid expects to double under the 5% pledge.
President Donald Trump, while supportive of increased allied spending, has argued the 5% target shouldn’t apply to the U.S.
Madrid added that defense contractors with meaningful international exposure are best positioned to capitalize on the trend, citing General Dynamics (NYSE:GD) and Kratos Defense (NASDAQ:KTOS) alongside his top picks.