Aerospace & Defense Sector Gains Momentum Amid Increased Global Spending
Aerospace & Defense Sector Continues Ascent Driven by Geopolitical Dynamics
U.S. equities in the aerospace and defense sector have demonstrated sustained upward momentum, with the Invesco Aerospace & Defense ETF (PPA) trading above $150 after a notable rally since early April 2025. This performance reflects growing investor confidence driven by an accelerating global defense landscape and shifting geopolitical priorities.
ETF Performance and Key Drivers
PPA, which tracks the SPADE™ Defense Index, experienced a sharp rally, moving from approximately $105 in early April to a range of $151 over the subsequent five months, achieving a new all-time peak in early Q3 2025. This ascent follows a correction in Q2 2025, where the ETF fell over 19.6% from a Q4 2024 record high. As of July 28, 2025, the ETF managed $6.08 billion in assets under management (AUM) and traded an average daily volume of 253,251 shares. It maintains a management fee of 0.57% and offers a blended dividend yield of 0.44%.
The primary catalyst for this sustained upward trend is a substantial increase in global defense spending and heightened geopolitical tensions. Twenty-three of twenty-seven EU NATO members have formally committed to defense outlays amounting to at least 3.5% of their GDP. Furthermore, Canada has expressed interest in collaborating with the United States on the "Golden Dome" missile defense shield project, underscoring a collective push towards enhanced security capabilities.
Underlying Company Performance and Strategic Positioning
Companies within the PPA ETF are strategically positioned to benefit significantly from these shifts. RTX Corporation (RTX), a significant holding with a 7.54% weightage in the ETF, reported robust financial results for Q2 2025, with revenues of $21.6 billion, marking a 9% year-over-year increase. Net income reached $1.7 billion, yielding a 7.7% profit margin, and its quarterly Earnings Per Share (EPS) of $1.56 surpassed the analyst consensus of $1.45. RTX maintains a substantial demand backlog of $236 billion as of Q2 2025, with $92 billion specifically from defense contracts.
Similarly, L3Harris Technologies (LHX), carrying a 4.06% weightage, reported $8 billion in new orders during Q2 2025, expanding its backlog to $35.4 billion, of which $20 billion is attributed to defense-related orders. General Dynamics (GD) has also seen its backlog reach an "all-time high" of $91.1 billion as of Q2 2025, representing a 14.5% growth in six months. Including IDIQ contracts, this figure rises to $161.2 billion.
The U.S. "Golden Dome" multi-layered missile defense project alone is projected to drive over $175 billion in defense contracts over the next three years, with an estimated $831 billion in post-initiation costs over the subsequent two decades. This trend is further bolstered by the U.S. President Trump's "One Big Beautiful Bill Act of 2025," which added $150 billion to the Pentagon's budget for initiatives such as the missile defense system, weapons acquisition, shipbuilding, and border security.
Broader Market Context and Analyst Outlook
The S&P Aerospace and Defense Select Industry Index was up 44% so far in 2025, significantly outperforming the broader S&P 500 Index, which returned 10.3% over the same period. This substantial outperformance highlights investor confidence in the defense sector's resilience and growth prospects, which are increasingly seen as insulated from broader economic fluctuations due to their reliance on government contracts.
The sustained rally in defense stocks is a direct consequence of a rapidly deteriorating geopolitical environment, including ongoing conflicts in Eastern Europe and the Middle East, which have prompted countries globally to modernize their arsenals and bolster security capabilities. According to analysis by Morgan Stanley, European defense leaders such as Airbus and Rheinmetall are also poised for significant growth. Rheinmetall's Earnings Per Share (EPS) Compound Annual Growth Rate (CAGR) is estimated at 32% over 2024-2030, based on NATO countries meeting the 2% GDP defense spending target. New targets by NATO for 3.5% of GDP by 2035 represent further potential upside.
Future Implications and Key Watchpoints
The long-term outlook for the aerospace and defense sector remains bullish, underpinned by sustained political commitments and strategic policy shifts. At the 2025 NATO Summit in The Hague, allies committed to investing 5% of their gross domestic product (GDP) annually on core defense requirements and security-related spending by 2035, a significant increase from 2.61% in 2024.
In Europe, the European Commission's ReArm Europe plan aims to loosen fiscal rules, allowing member states to spend an additional €650 billion on defense, and includes a €150 billion loans-for-arms fund to facilitate the procurement of weapons systems. On the U.S. front, the administration proposed a substantial $849.8 billion defense budget for fiscal year 2025, with an additional $156.2 billion in new funding for national security priorities.
These ongoing commitments and the continuous need for enhanced national and international security suggest continued revenue growth and contract opportunities for companies within the sector. Technological advancements in cybersecurity, AI-driven autonomous systems, hypersonic weapons, and space-based defense assets are also shaping future demand. Investors will closely monitor progress on these geopolitical commitments, major defense project timelines, and the quarterly earnings reports of key defense contractors for sustained momentum in the coming quarters.
