Key Points
Increased military spending in Europe is the primary driver of global defense expenditure growth. The United States remains the world's top defense spender, allocating $954 billion in 2025 alone. Defense stocks worldwide saw broad gains in 2025 as governments expanded their military budgets.
In the early hours of June 18, 2025, Israeli air defense systems were activated to intercept Iranian missiles over Tel Aviv. This engagement on June 17 marked the fifth day of the most intense confrontation between the two nations in history, raising concerns about a prolonged conflict in the Middle East. Data from the Stockholm International Peace Research Institute (SIPRI) indicates that a significant increase in European military spending in 2025—a long-standing request from U.S. President Trump—propelled global defense expenditure to a staggering $2.89 trillion. A SIPRI report released on Monday highlighted that major rearmament programs in Asia also contributed to the 11th consecutive year of rising global military spending in 2025. SIPRI stated that the growth in expenditure stems from "another year of war, uncertainty, geopolitical turmoil, and a wave of large-scale arms buildup." The report shows that global military spending as a share of GDP rose to 2.5%, the highest level since 2009. Europe: Primary Engine of Global Growth Europe served as the main catalyst for the increase in global military expenditure, with spending rising by 14% to $864 billion. Excluding Russia, Germany was Europe's largest military spender, with a 24% year-on-year increase to $114 billion. In 2025, German military expenditure reached 2.3% of its GDP, surpassing NATO's 2% guideline for the first time since 1990—a benchmark encouraged for member states. Spain's military spending surged by 50% to $40.2 billion, with its defense burden exceeding 2% of GDP for the first time since NATO set its spending target in 1994. In June 2025, NATO members excluding Spain established a long-term goal to increase defense spending to 5% of GDP by 2035; Spain did not participate in this commitment. United States: Contraction in Spending Although global military expenditure continued to grow, the rate of increase slowed to 2.9% in 2025, significantly lower than the 9.7% seen in 2024. This deceleration was primarily due to a 7.5% reduction in U.S. military spending, following the non-approval of new financial aid for Ukraine that year. The United States maintained its position as the world's top spender at $954 billion; China ranked second, with estimated expenditure growing 7.4% to $336 billion. Some experts suggest the actual figure may be higher, as China does not fully disclose its military spending data.
Nan Tian, Director of SIPRI's Military Expenditure and Arms Production Programme, commented, "The decline in U.S. military spending in 2025 may be a temporary phenomenon." The U.S. Department of Defense has requested approximately $1.5 trillion for the 2027 fiscal year, a record-high budget proposal. Asia: Significant Increase in Military Spending Military expenditure in the Asia-Pacific region grew by 8.1% in 2025 to $681 billion, the largest annual increase since 2009. Diego Lopes da Silva, Senior Researcher at SIPRI, noted, "Increased spending by U.S. allies in the Asia-Pacific, such as Australia, Japan, and the Philippines, stems from both long-standing regional tensions and growing uncertainty about U.S. support." Military spending by Taiwan grew by 14% to $18.2 billion, equivalent to 2.1% of its GDP, representing the largest annual increase since at least 1988. SIPRI pointed out that this move coincides with increasingly frequent military activities by the People's Liberation Army around Taiwan. According to local media reports, China conducted two large-scale military exercises around Taiwan in 2025 (in April and December); the number of sorties by military aircraft around the island surged from 380 in 2020 to a record 5,709 in 2025. Furthermore, Japan's military expenditure increased by 9.7% in 2025 to $62.2 billion, accounting for 1.4% of its GDP, the highest level since 1958. Prime Minister Sanae Takaichi, upon taking office, pledged to raise defense spending to 2% of GDP, reflecting a significant shift in Japan's security policy. In April, Japan lifted its ban on lethal weapon exports and signed its first warship export project with Australia: Mitsubishi Heavy Industries will build three new frigates for the Royal Australian Navy. Surge in Defense Stocks The surge in military spending drove defense stocks sharply higher across Europe and Asia. Shares of South Korea's largest defense company, Hanwha Aerospace, soared 193% in 2025, following a 154% gain in 2024. The company, renowned for producing the K9 self-propelled howitzer, is one of the world's largest exporters of such equipment. Other defense firms, such as Hyundai Rotem, manufacturer of the K2 main battle tank, and LIG Nex1, an air defense system manufacturer, saw their share prices rise by 278% and 91% respectively in 2025.
In Japan, commitments by the Takaichi government to increase defense investment boosted defense stocks even before the easing of weapons export restrictions:
Mitsubishi Heavy Industries: rose 72.7% in 2025 Kawasaki Heavy Industries: up 42.6% IHI Corporation: surged 107.1%
European defense stocks also showed strong performance:
Germany's Rheinmetall: up 154% ThyssenKrupp: up 215%
In 2025, the European Union planned to mobilize up to €800 billion (approximately $883 billion) by 2030 to enhance regional security. Rheinmetall specializes in infantry fighting vehicles, large-caliber artillery, and air defense systems; ThyssenKrupp produces naval equipment such as frigates and submarines. Germany passed a historic debt reform in March 2025, paving the way for a substantial increase in defense spending. Shares of UK's BAE Systems, manufacturer of the Eurofighter Typhoon and components for the F-35 Lightning II, rose 49.2% in 2025, as the British government concurrently pledged to increase its defense budget.
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