US investors lean into defense amid rising global conflict

US investors are raising defense exposure, betting that geopolitically driven military spending will stay elevated for years, the Financial Times reports. The shift is being driven by conflicts including Russia’s invasion of Ukraine and the US-Iran war as well as rising defense budgets that have brought the sector back into favor after years of ESG-related caution.

Why defense?

Bigger budgets, fewer ESG brakes: Global instability has pushed Western governments to ramp up military spending. Europe’s defense spending rose 60% between 2020 and 2025, while the US has proposed a USD 1.5 tn military budget for 2027, up from USD 901 bn this year. ESG constraints that once weighed on defense allocations have also eased, particularly in the US, where political pushback is reframing the sector as a national and social priority.

Not just about current conflicts: Investor positioning is increasingly driven by expectations of future escalation, including a potential Russia-NATO confrontation, a Taiwan crisis involving China and the US, and wider Middle East instability. This new outlook reframes defense as a “multiyear demand story” rather than a cyclical trade, State Street Investment Management’s Matthew Bartolini told the Financial Times.

Tracking the capital shift

Institutional allocations on the rise: Annual US public pension commitments to defense-focused private equity funds more than doubled between 2022 and 2025, according to Dakota Marketplace data cited by the salmon-colored paper. The trend has carried into 2026, with double-digit growth in 1Q defense-focused fund commitments, even as broader private equity allocations declined, based on FT analysis of public data.

Defense exposure is also climbing in listed markets: US defense-focused exchange-traded funds (ETFs) recorded net inflows of USD 4.8 bn in 1Q 2026, up from USD 283 mn a year earlier. The S&P Aerospace & Defense Select Industry Index has risen 142% since Russia’s invasion of Ukraine in 2022, compared with a 64% gain in the S&P 500 over the same period.

Defense funds have also scaled up fast: Arlington Capital Partners raised USD 6 bn for its latest defense-focused fund in October, up 57% from its predecessor with backing from nearly a dozen public pension plans. Invesco’s Aerospace & Defense ETF has also grown to USD 8.4 bn from USD 653 mn in 2022, fueled by sustained inflows and rising investor interest, Invesco’s Rene Reyna said.

BUT- Is the trade getting crowded? Despite strong gains, some investors warn that valuations may be stretching. Defense stocks appear “overvalued on a growth-adjusted basis,” with concerns of overheating in parts of the market, Reyna said. Others, including Wyoming Retirement System trustee Paul O’Brien, question defense's broader economic contribution versus infrastructure or technology, noting that defense assets generate limited direct output unless deployed.

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THE CLOSING BELL: NOMU-

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