Key Points
Defense tech stocks are rewriting what investors expect from the military-industrial corner of the market.
For decades, defense contractors were the definition of “steady”: predictable revenue, solid margins, and dividends investors could count on. That appeal hasn’t disappeared for giants like Lockheed Martin Corp. and RTX Corp., but 2025 has introduced a new storyline—one that looks a lot more like high-growth technology investing than traditional defense.
This year’s biggest share-price winners aren’t always the biggest names. They’re faster-moving companies tied to drones, satellite intelligence, and data analytics. The result is a market shift that’s turning a historically staid sector into one of the stock market’s most aggressive growth trades.
Defense Tech Stocks Surge as Investors Reprice the Business of War
The new leaders in share-price appreciation include drone maker Kratos Defense & Security Solutions Inc., satellite intelligence outfit Planet Labs PBC, and data analytics company Palantir Technologies Inc. Each has seen its stock at least double this year. AeroVironment Inc. and BlackSky Technology Inc. have also delivered strong returns.
Their rise is tied to a bigger change in how conflict is being fought—and how militaries are spending. The shift is most visible in Ukraine’s drone-led defense against Russia’s invasion. At the same time, President Donald Trump has upended long-standing alliances, pushing nations across Europe and Asia to raise spending on their militaries and defense capabilities, with some of that money expected to flow to US contractors.
James St. Aubin, chief investment officer at Ocean Park Asset Management, called 2025 a “new dawn in defense stocks.”
“Defense was defensive for a long time,” he said, adding that while it remains true “to some degree,” the sector “is taking a new turn.”
That turn has shown up clearly in performance. The S&P 1500 Aerospace and Defense group, home to 24 companies, is on its way to a 41% jump—its biggest gain since 2013. The move has also been lifted by strength in commercial aerospace. The group’s rise is more than double the S&P 500’s advance, and about 16 percentage points ahead of the so-called Magnificent Seven tech behemoths.
Defense tech stocks, in other words, aren’t just outperforming defensive corners of the market. They’re competing with the market’s most famous growth names.
The Old Guard Still Rallies, but the Story Is Changing
Traditional heavyweights remain central to investor portfolios.
In the US, RTX and Northrop Grumman Corp. have posted double-digit advances. Investor enthusiasm has been supported by expectations around US military spending, along with programs such as the Golden Dome missile-defense effort. Even the possibility that the Trump administration will pressure defense contractors to cut buybacks and dividends has done little to damp sentiment.
Outside the US, Europe’s defense champions have rallied too as governments move to increase military budgets. Germany’s Rheinmetall AG, Sweden’s Saab AB, and Italy’s Leonardo SpA have all benefited from the continent’s push to supercharge defense spending.
But the market’s tone has shifted. The old model—buy defense for stability—now sits beside a newer model: buy defense for growth.
That’s where defense tech stocks come in.
Drones, Satellites, and AI Pull New Players Into the Spotlight
A key feature of the 2025 rally is the rise of companies that look and trade more like tech firms than classic industrial contractors.
The newcomers are filling gaps with high-tech systems and tools that can make fighting more lethal and less manpower-intensive—an approach that aligns with the Department of Defense’s push to move faster.
Trump signed an executive order in June aimed at unleashing “drone dominance.” Defense Secretary Pete Hegseth issued a memo with the same theme and warned the largest contractors to speed up weapons development—or “fade away.”
RBC analyst Ken Herbert said the Department of Defense is pushing to get “technology to the warfighter faster,” including efforts to accelerate contract awards and direct more business to smaller companies leaning into technology.
That theme helps explain why defense tech stocks linked to drones, satellite intelligence, and advanced analytics have drawn so much investor attention.
It also helps explain why the investor base appears to be changing.
Defense Tech Stocks Attract a New Breed of Risk-Taker
Defense investing has typically been associated with lower volatility and less dramatic valuation debates.
This year looks different. Some of the smaller military contractors appear to be drawing investors who are more comfortable with the risk profile seen in cryptocurrency or artificial intelligence trades—big upside potential paired with sharp downside moves.
Part of the appeal is that many military technology firms are embracing AI. Planet Labs applies image analysis, while Palantir is tied to tools used for finding battlefield targets.
Even with frequent talk of a possible end to the Ukraine war through US-led peace talks that continue to fall short, the conflict has still driven attention to new battlefield realities.
Stifel analyst Jonathan Siegmann said that even if there’s an accord soon, the Ukraine war has “accelerated attention to how much warfare is changing.”
That changing warfare narrative has become one of the strongest tailwinds for defense tech stocks.
Investors Pay Up—and Valuations Look Extreme
The same forces pushing defense tech stocks higher are also creating discomfort around valuation.
This year’s rally has delivered the kind of high-risk, high-reward price action rarely seen in the defense sector. Mark Malek, chief investment officer at Siebert Financial, argued the gains reflect what these companies do.
“These stocks have been turbocharged because of what they do,” he said. “From a finance perspective, you can’t get upside unless you get risk.”
Even after pullbacks, several valuations remain elevated.
- Kratos trades at about 100 times the next 12 months’ estimated earnings.
- Palantir’s multiple is above 190, a figure that has long been debated on Wall Street.
- By comparison, RTX is valued at 27 times earnings.
- Lockheed Martin trades at 16 times, despite being one of the sector’s defining names.
Tony Bancroft, portfolio manager for the Gabelli Commercial Aerospace and Defense ETF, described valuations for Kratos and AeroVironment as “extreme multiples.” He said he likes the markets they’re in and believes drones will grow, but suggested it may not be “the sweet spot” for where he’s looking to focus.
That gap—belief in the theme, concern about the price—is now central to how investors are approaching defense tech stocks.
The Rally Isn’t Smooth: Outlook Misses and Sharp Pullbacks
High expectations come with a cost: the market punishes disappointment quickly.
Kratos and fellow drone maker AeroVironment delivered tepid outlooks this quarter due to growing pains, and shares were hit hard in response. AeroVironment has fallen about 40% from an October record high, a reminder that even strong themes can produce painful drawdowns when valuations are stretched.
This is part of what makes the current defense tech stocks cycle different from the traditional defense playbook. Instead of investors focusing primarily on dividends and predictability, many are weighing momentum, program wins, and the pace of adoption—dynamics that can move prices faster in either direction.
A Budget Shift Away From Traditional Hardware
Another reason the sector’s leadership is changing is the expectation that military budgets will tilt over time.
Benjardin Gaertner, head of equities at DWS Group, Deutsche Bank’s asset-management arm, said militaries are likely to move spending away from traditional equipment such as tanks and other armored vehicles, and toward technology. He suggested investors shift accordingly and said the change in priorities will benefit companies in the US and China disproportionately.
JPMorgan’s Seth Seifman also framed the shift as rational, but with an important warning label. In a note Friday, he said the increased focus on non-traditional contractors makes sense, “though it requires a different approach than defense investors are accustomed to.”
His view: expect less emphasis on traditional valuation metrics, more need to understand individual programs, and a smaller role for cash return.
That is another way of saying defense tech stocks may behave less like classic defense holdings and more like a specialized tech segment—where understanding the product and its adoption matters as much as the quarterly numbers.
Conclusion
Defense tech stocks have turned a familiar sector into one of 2025’s most closely watched growth trades.
Big defense primes like Lockheed Martin and RTX are still essential pillars for investors, especially those seeking stability. But the market is increasingly rewarding companies tied to drones, satellite intelligence, and AI-enabled analytics—areas that fit the Department of Defense’s push for speed and modernization, and reflect battlefield lessons that have become impossible to ignore.
The opportunity comes with a clear trade-off. The upside has been powerful, but valuations are high and the selloffs can be sudden when expectations slip. For investors, the question is no longer whether defense is “defensive.”
It’s whether defense tech stocks deserve to be valued like tomorrow’s technology winners—or priced like yesterday’s dependable contractors.
