Introduction

At the 2025 NATO Summit in The Hague, member states committed to one of the most significant defence policy shifts in the alliance’s history: raising defence spending to 5% of GDP by 2035. The commitment breaks down into 3.5% for core military spending (personnel, operations, equipment, and maintenance) and 1.5% for security-related spending including cyber defence, supply chain resilience, critical infrastructure, and defence innovation.

This commitment is now moving from summit rhetoric to national execution. Member states were required to submit national roadmaps outlining how they will meet the 5% target by mid-2026. A collective review of progress is scheduled for 2029, and the final deadline is 2035. The NATO Summit in Ankara on July 7-8, 2026 will focus heavily on how members are progressing toward these commitments.

For investors, this represents one of the largest sustained increases in defence spending since the end of the Cold War. European defence budgets alone are projected to grow at 6.8% annually through 2035, well above global GDP growth. Total European core defence spending could reach around €800 billion (roughly $912 billion) by the end of the decade, more than doubling from current levels.

The implications ripple across dozens of sectors and companies. This article breaks down what the NATO 5% commitment means, which sectors and companies are positioned to benefit, and what investors should watch as the rearmament supercycle unfolds.

 

The Path to 5%: How We Got Here

Understanding the significance of the 5% target requires a brief look at recent history. For most of the post-Cold War era, NATO members struggled to meet even the 2% GDP defence spending target agreed at the 2014 Wales Summit. By 2022, when Russia invaded Ukraine, only a handful of NATO members were spending 2%. Most others were significantly below.

The Ukraine war changed the political calculus overnight. Germany announced a €100 billion special defence fund. Poland committed to 4% of GDP, one of the highest levels in NATO. Countries across Central and Eastern Europe accelerated procurement. Overall NATO defence spending rose sharply, with European members leading the pace of increases.

The 5% commitment in The Hague was the political recognition that even these increased spending levels were not sufficient. Continued Russian pressure, uncertainty about the long-term US security commitment to Europe, expanding cyber threats, and the recognition that modern warfare requires investment far beyond traditional military hardware all pushed the alliance toward a much more ambitious target.

The 3.5% core defence component alone would require raising European defence budgets by hundreds of billions of euros annually. Adding the 1.5% for security-related spending pushes total commitments well over $1 trillion in additional annual spending across the alliance by 2035.

 

What’s Being Bought: The Structure of the Spending

The NATO 5% commitment isn’t a single category of spending. It covers a wide range of capabilities across two broad tiers.

The core 3.5% includes traditional military categories: personnel, operations and maintenance, equipment procurement, and research and development. Within this, the largest spending increases are expected in equipment procurement (aircraft, ships, tanks, missiles, artillery), personnel expansion (recruitment and retention costs), and R&D (next-generation defence technology).

The 1.5% security-related component is arguably more novel. It covers cyber defence, supply chain resilience, critical infrastructure protection, logistics, defence innovation, and support for defence industrial capacity. This is where the boundary between “defence” and broader industrial or digital investment becomes blurred, creating opportunities for companies far beyond the traditional defence prime contractors.

For investors, this two-tier structure matters. The core 3.5% drives spending toward the recognisable defence names. The 1.5% pulls in cybersecurity firms, industrial suppliers, technology companies, and infrastructure providers.

 

Winners: European Defence Primes

The most direct beneficiaries of the NATO surge are the European defence prime contractors. These companies were undervalued for decades relative to their US counterparts. That gap has closed dramatically since 2022, and the 5% commitment provides visibility on continued growth for years to come.

Rheinmetall has emerged as the poster child of the European rearmament story. The German group’s order backlog has doubled to €135 billion, roughly 9.5 years of forward revenue coverage. The company guides revenue growth of 40-45% in 2026 to €14-14.5 billion, and is opening 13 new plants to meet demand. Rheinmetall has become a proxy for the entire European defence surge.

BAE Systems offers a differentiated profile. It is the only European prime with substantial US Department of Defense exposure (roughly 45% of revenue), which gives it geographical diversification alongside secular growth. It also carries a more reasonable valuation than many of its European peers, making it attractive for investors who want defence exposure without paying peak multiples.

Leonardo in Italy, Thales in France, and Saab in Sweden round out the European defence prime universe. Each has benefited from surging order books since 2022. Each is expanding capacity, hiring, and investing in R&D. The commitment structure of the 5% target means their growth runway is now measured in decades, not quarters.

 

Winners: US Defence Primes

The US defence primes benefit from the NATO surge on multiple fronts. First, European allies are major buyers of US equipment, particularly aircraft and missile systems. Second, the broader geopolitical environment supports higher US defence spending, though at a slower pace than Europe. Third, joint programmes and interoperability requirements between NATO members funnel work to US primes.

Lockheed Martin sits at the top of the list. The company has a $194 billion backlog and is central to the F-35 programme, which multiple NATO members are buying or expanding. Missile systems including PAC-3 and Javelin are in unprecedented demand.

RTX (formerly Raytheon), Northrop Grumman, and General Dynamics each have significant NATO exposure. RTX’s Patriot missile system, in particular, has become one of the most sought-after air defence products globally, with Poland, Germany, Romania, and others placing major orders.

L3Harris and Palantir Technologies represent the newer generation of defence contractors, focused on communications, intelligence, and battlefield software. Both have seen strong growth as NATO members invest in networked, data-driven defence capabilities.

 

Winners: Cyber, Space, and the 1.5%

The 1.5% security-related component of the NATO commitment opens up a much wider set of investment opportunities than traditional defence. Cyber defence is one of the largest categories. Companies including Palo Alto Networks, CrowdStrike, Fortinet, and specialist defence-cyber firms benefit from expanded government cybersecurity budgets.

Space is another emerging category. Satellites for communications, surveillance, and navigation are now considered critical defence infrastructure. Companies including L3Harris, Northrop Grumman, Airbus Defence and Space, and pure-play satellite operators are all benefiting.

Supply chain resilience is a broader theme still. This overlaps with themes we have explored in previous articles, including critical minerals and semiconductor supply security. Governments are increasingly recognising that defence capability depends on secure supply chains for materials, chips, and manufacturing capacity. Investment in these areas counts toward the 1.5% commitment.

Defence innovation, including AI applications for military use, autonomous systems, and next-generation communications, is another significant sub-category. This creates opportunities for both established primes with dedicated innovation arms and newer specialised companies like Palantir, Anduril, and Rocket Lab.

 

Winners: Supply Chain, Metals, and Materials

The rearmament surge creates significant demand for the industrial supply chain that feeds defence manufacturing. Steel, aluminium, copper, rare earths, and specialty alloys all see structural demand growth. This connects to our earlier coverage of the April Section 232 tariffs and the critical minerals battleground.

Defence electronics require semiconductors, and secure sourcing has become a strategic priority. Companies with US or allied manufacturing footprints benefit disproportionately as defence programmes shift procurement toward geopolitically aligned suppliers.

Shipbuilding is another beneficiary. NATO members including the US, UK, Australia (through AUKUS), Japan, and South Korea are all expanding naval capacity. Companies including General Dynamics (Electric Boat), Huntington Ingalls, and BAE Systems (submarines) have multi-decade backlogs.

Precision manufacturing, artillery ammunition, and missile production capacity are all constrained. Companies expanding capacity in these areas benefit from both government contracts and the natural pricing power that comes with limited supply.

 

Losers and Areas of Complication

Not everything benefits from the rearmament surge. Higher defence spending eventually has to be paid for, and this creates fiscal pressure that affects other sectors.

Countries facing the largest defence spending increases relative to GDP, particularly in Southern and Central Europe, may face budget pressure that affects healthcare, education, and infrastructure spending. Bond markets have already responded, with sovereign bond yields in some European countries reflecting concerns about defence-related debt issuance.

Consumer discretionary sectors could face pressure if government spending crowds out household disposable income through higher taxes or debt-service costs. Real estate could be affected in countries pursuing aggressive spending increases.

Certain defence sub-sectors may also face challenges. Traditional heavy platforms (large tanks, some legacy aircraft) may lose ground to lighter, more mobile, and more networked capabilities. Companies over-indexed to older platforms face slower growth than the headline defence numbers might suggest.

Political risk is another consideration. The 5% commitment is a target, not a legally binding requirement. Government changes could slow implementation. Fiscal crises could delay procurement. Investors need to price in some execution risk alongside the structural tailwind.

 

Regional Dynamics: Who’s Spending, Who’s Hesitating

Not all NATO members are moving toward the 5% target at the same pace. Understanding the regional dynamics is essential for identifying the most reliable winners.

Poland already spends roughly 4.7% of GDP on defence and has committed to going higher. Its geographic position on Russia’s border and the political will to prioritise defence make it one of the most credible spenders. Polish defence contracts have flowed to Korean, US, and European suppliers.

Germany has committed hundreds of billions of euros to defence and has emerged as a major driver of European defence procurement. The Rheinmetall growth story is significantly underpinned by German demand.

The Baltic states and Nordic countries (Sweden, Finland) have also moved aggressively, driven by proximity to Russia. Their small economies mean absolute spending is modest, but their commitment is credible.

Southern European members including Spain, Italy, and Greece face harder fiscal choices. They are increasing spending but at slower paces, and questions remain about whether they can credibly reach 5% by 2035 without significant political or economic pain.

The UK and France are two of Europe’s largest defence spenders in absolute terms and are actively modernising. Both have significant defence industrial bases that benefit from higher domestic and export orders.

For investors, understanding this regional variation helps identify which specific national procurement programmes are likely to drive company results. A Rheinmetall order backlog anchored by Germany and Poland is more secure than one dependent on more fiscally stressed members.

 

What Investors Should Watch

Several variables will shape how the rearmament supercycle unfolds:

  • National roadmap submissions. Members were required to submit plans by mid-2026. The credibility of these plans, particularly for financially stressed members, will affect market confidence in the 5% commitment.
  • The Ankara Summit outcomes. The July 7-8 summit will provide the next opportunity to assess progress. Watch for specific commitments, procurement announcements, and any signs of hesitation.
  • US political dynamics. The US commitment to European security has been a consistent focus of debate. Any signal about the US role in NATO affects European calculations about how urgently to increase spending.
  • Capacity constraints in the defence industrial base. Rheinmetall and other primes are hitting the limits of current production capacity. Expansion is happening but takes years. Watch for signals about whether demand is outpacing supply or supply is catching up.
  • Emerging technologies. AI applications, autonomous systems, drone warfare, and cyber capabilities are increasingly important. Traditional defence portfolios may need to rotate toward companies with strong positions in these emerging categories.
  • Fiscal reactions. Bond market reactions to increased defence spending, particularly in fiscally stressed European countries, could shape the political willingness to sustain higher defence budgets.
  • Ukraine conflict trajectory. The political momentum for higher defence spending has been driven significantly by the Ukraine war. Any significant change in that conflict, in either direction, could affect the political calculus.

 

Sector Implications and DCSC

The NATO 5% commitment cuts across defence and aerospace, cybersecurity, space, industrial manufacturing, semiconductors, critical minerals, and infrastructure. DCSC’s Dynamic Company Sector Classification system tracks over 1,500 sectors, giving investors the granularity to map portfolio exposure to the specific industries benefiting from the rearmament supercycle.

Key sectors to explore include defence and aerospace, missiles and munitions, cybersecurity, satellite and space services, shipbuilding, industrial manufacturing, steel and specialty metals, semiconductors, and defence software and analytics. Each has distinct dynamics within the NATO commitment framework and different exposure to regional, technological, and fiscal risks.

The NATO 5% commitment is likely to be one of the defining investment themes of the next decade. The scale of the spending increase, the geopolitical backdrop that supports it, and the breadth of sectors it touches make it a rare multi-year opportunity. For investors, understanding both the structural tailwind and the specific dynamics of individual companies and sectors is essential.

Explore the full sector taxonomy at dcsc.ai.