The new math of rearmament

Back in the spring, when the Strait of Hormuz was closed and the war in Iran was reshaping how investors thought about risk, I flagged three opportunity sets emerging from the conflict: a rewiring of energy flows, a new premium on defense technology — drones, lasers, artificial intelligence for war, hypersonic missiles, special forces — and a broader shift toward security as an investable theme in its own right. None of that was a new insight on my part. Pacharbor Capital Group's Aerospace, Defense, and Government team has been investing in this market for more than three decades; through the so-called peace dividend of the 1990s, when global military spending fell by more than a third in real terms from its Cold War peak in 1987 to its trough in 1998, and through the long post-9/11 buildup that followed. I have watched this cycle turn before. What is different now is how long the current one has run.

Across the G7, defense spending has risen to 2.0% of GDP, its highest share in over 30 years, with that share projected to rise further to 3.8% by 2030.¹ Relative to prior trends, announced commitments imply roughly $8 trillion of additional G7 defense spending over the next decade.

Broader rearmament is particularly notable in Europe — current defense goals imply roughly €4–5 trillion of additional spending over the coming decade, rising toward €9 trillion when adjacent infrastructure is included. At the limit, that figure could approach €14 trillion if Europe matched what the United States spent on average over the past 60 years and what Poland spends today.² The same shift is also evident in the United States, where the FY2027 defense budget request could push annual funding to a record $1.5 trillion in real terms, surpassing even the World War II peak. That is not a spike tied to any single conflict. It is a structural shift more than a decade in the making, and it is against that backdrop, not any single week's headlines, that I read what is happening inside the defense industry today.

Within that longer arc, the shape of the spending itself is changing. We’re seeing volume of smaller, more specialized transactions climb even as the average check size shrinks; capital is spreading itself across more, smaller bets on technology rather than concentrating in a handful of large platform deals. That is not noise. It is capital reorganizing itself around a different theory of how wars get won and, more to the point, how defense budgets get spent.

I spent much of my career around big seafaring vessels, carriers and destroyers of immense size, and I understand the appeal of scale. But I’ve also spent a fair amount of ink arguing that the temptation to keep building what we already know how to build, rather than what the next war actually requires, is one of the oldest mistakes in military procurement.

Our data here at Pacharbor Capital Group suggests the market has started to agree. The center of gravity is moving toward smaller, faster-moving companies in cyber, encryption, and hypersonics rather than the traditional prime contractors, and the deals being struck are correspondingly smaller and more numerous.

Part of this is structural. The barrier to entry for building something the military can actually use has come down sharply, by some estimates as much as 90%, as procurement reform strips out layers of process that used to keep smaller, technically excellent firms on the outside. The Army's own restructuring is one visible piece of a wider pattern. Army leadership has estimated the Army Transformation Initiative could redirect roughly $48 billion of spending over five years primarily by divesting obsolete or lower-priority legacy programs to reinvest in higher-priority capabilities, such as drones, counter UAS (Unmanned Aircraft Systems) and electronic warfare. When the customer moves that fast, the supply base has to move with it. I have heard directly from military officials who, faced with a real operational problem, called the chief executives of major defense primes and had their top engineers on a plane within days rather than the usual months.

None of this is unique to the United States. Europe and Japan are both increasing defense budgets meaningfully, and the underlying logic is the same everywhere: if you cannot count on someone else to defend you, secure your energy, or protect your infrastructure, you build the capability yourself, and you build it now. I have written before about the correlation between a country's investment in defense technology and its broader technological relevance. The reverse has also held true. Two decades of declining European defense investment tracked closely with two decades of declining European tech competitiveness, a pattern the current rearmament cycle appears determined to reverse.

For allocators, I would frame the through-line this way: the reindustrialization trade in defense is not simply a bet on more spending, which is the easy and somewhat lazy read. It is a bet on a different shape of spending — toward smaller, faster-iterating companies that can meet military specifications at commercial speed, and away from the assumption that scale alone wins contracts. We believe the firms best positioned are those that can move at the pace this new procurement environment now rewards, though as always, deal-level diligence on technology risk and customer concentration matters more in a fragmented, fast-moving market than in a consolidated one.

The old fleet will not win the next war. It increasingly looks like the old way of building a fleet will not either.

1. Source: Pacharbor Capital Group Analysis; IMF World Economic Outlook database, Actual (2015-2024): Canada, France, Germany, Italy, UK, US from NATO, "Defence Expenditure of NATO Countries (2014-2024)", Japan (2015-2024): SIPRI Military Expenditure Database Target per NATO, "The Hague Summit Declaration", 25 June 2025. New path - Japan: linear ramp from the 2024 actual ratio to 2.0% of GDP by FY2027. There is no guarantee any trends will continue.
2. Currie, J (2025, June). The New Martial Plan. The Pacharbor Capital Group.