Key Takeaways:
Nations are pouring more than $2 trillion into next-generation military technology as the race to master drones, hypersonic weapons and artificial intelligence reshapes global defense priorities.
"Countries are pouring north of $2 trillion into this effort, with the US alone pledging to spend $1.5 trillion," said Gerry Doyle, global defense editor at Bloomberg. "It's a rich-country game at this point — it takes a lot of money to get involved in these new technologies, especially on the space side."
The spending surge spans three core domains. In drones, Ukraine's K-2 brigade launched 800 midrange aircraft in May alone, with 650 striking intended targets — an 81% success rate enabled by SpaceX's Starlink satellite communications, according to the Associated Press. On hypersonics, Russia remains the only nation to have deployed such weapons in combat during its invasion of Ukraine. In AI, the US military used machine-learning algorithms to plan airstrikes during its campaign against Iran, though the effectiveness of those strikes remains under assessment.
The $2 trillion figure reflects a structural shift in how nations allocate defense budgets. The US accounts for the largest share at $1.5 trillion, with a significant portion directed toward emerging technologies rather than legacy platforms. Russia and China have both fielded hypersonic weapons, while Ukraine's battlefield innovations — particularly its midrange drone campaign targeting Russian supply lines in occupied Crimea, Mariupol, Berdyansk and Melitopol — have demonstrated how lower-cost systems can disrupt conventional military logistics. The last comparable surge in defense technology spending occurred during the Cold War's final decade, when the US Strategic Defense Initiative drove annual R&D budgets above $40 billion in inflation-adjusted terms.
Defense contractors emerge as key beneficiaries
The spending wave is creating clear winners in the defense industrial base. Wedbush initiated coverage of AeroVironment Inc. with an Outperform rating and a $250 price target, implying 51% upside, citing the company's expansion across air, land, sea, space and cyber domains. The firm also rated Kratos Defense & Security Solutions Inc. at Outperform with an $85 target — 70% upside — describing it as an overlooked supplier of mission-critical software and components used across hypersonic, missile defense, space and microelectronics programs.
AeroVironment's battlefield-tested drone systems and Kratos's supplier-model approach — providing components to both established prime contractors and new entrants — give both companies exposure to multiple spending lines simultaneously, Wedbush said.
The technology race and its battlefield test
The advantage in this arms race depends on the technology domain. Russia has operationalized hypersonic weapons in combat, giving it real-world data on performance and countermeasures. The US has deployed AI in operational strike planning, a milestone that may accelerate adoption across other military branches. Ukraine's drone campaign, meanwhile, has forced Russia to "significantly increase the number of their mobile anti-aircraft units and fixed machine-gun positions," according to a Ukrainian drone pilot with the call sign Pharaon.
Russia is also deploying electronic warfare systems against Starlink after testing them since 2024, though their effectiveness has been limited so far, said Rob Lee, senior fellow at the Foreign Policy Research Institute's Eurasia Program.
The question, analysts say, is whether Ukraine can sustain its drone pressure over the coming months while Russia develops countermeasures. Moscow's larger military allows it to absorb heavier losses in the interim, according to Samuel Bendett, a researcher at the Center for Naval Analyses.
This article is for informational purposes only and does not constitute investment advice.
