Assessing Geopolitical Risks and Their Impact on Defense and Security Sectors

The world in 2025 is defined by a fragile equilibrium, where geopolitical instability has become the new normal. From the war in Ukraine to escalating tensions in the South China Sea and the Middle East, the global order is under strain. This volatility is not merely a political or military concern—it is a catalyst for a seismic shift in the defense and security sectors. As governments and private investors recalibrate their strategies, the demand for advanced defense technology and intelligence infrastructure is surging, reshaping markets and redefining national priorities.

According to a report by Deloitte, the U.S. Department of Defense has requested an $849.8 billion budget for fiscal 2025, with a sharp focus on unmanned systems, space-based assets, and AI-driven capabilities [2]. This reflects a broader trend: NATO members have pledged to increase defense spending to 5% of GDP by 2035, a commitment that could inject trillions into emerging technologies like autonomy, cybersecurity, and directed energy systems [1]. The defense budget market, valued at $541.1 billion in 2025, is projected to grow at a compound annual rate of 6.9%, reaching $985.4 billion by 2034 [3]. Such figures underscore a sector in transformation, driven by urgency rather than mere planning.

The urgency is evident in the contracts being awarded. In July 2025 alone, the U.S. Air Force allocated over $4.3 billion to Vertex Aerospace for T-6 aircraft support, while Lockheed Martin secured a $4.29 billion modification for JASSM and LRASM missile production [1]. Raytheon’s $3.5 billion AMRAAM missile contract further highlights the pivot toward precision strike capabilities and air-to-air dominance [1]. These are not isolated deals but part of a coordinated strategy to modernize arsenals and secure supply chains in an era of hybrid warfare and cyber threats.

The integration of artificial intelligence into military operations is accelerating. The Army’s $49 million contract with Govini for AI software licenses signals a shift toward data-driven decision-making and predictive analytics [3]. Meanwhile, the DoD’s collaboration with startups and venture capital firms—such as its partnerships with P72.vc and others—is breaking down traditional barriers, enabling rapid deployment of dual-use technologies like autonomous drones and quantum computing [5]. This convergence of public and private innovation is not just enhancing military readiness; it is creating cross-sector spillovers that benefit industries from energy to logistics [4].

Yet, the path forward is not without challenges. Tariff-related uncertainties and supply chain disruptions—particularly in sourcing critical materials like titanium and avionics—pose risks to timely delivery of systems [1]. Additionally, the ethical and regulatory frameworks for AI in warfare remain underdeveloped, raising questions about accountability and escalation. Investors must weigh these risks against the sector’s growth potential, which is undeniably robust.

For those seeking opportunities beyond traditional defense contractors, the ancillary beneficiaries of this boom are emerging. Semiconductor manufacturers, cybersecurity firms, and energy optimization companies are seeing surges in demand as defense modernization drives innovation [4]. Morgan Stanley analysts note that the defense tech ecosystem is expanding to include players in cloud computing, satellite communications, and even biotechnology, all of which are critical to next-generation intelligence infrastructure [4].

The geopolitical landscape is a double-edged sword. While instability fuels demand, it also introduces volatility. Investors must adopt a nuanced approach, balancing long-term strategic bets with short-term risk mitigation. The defense and security sectors are no longer insulated from broader economic and technological trends—they are at the forefront of them.

As the world grapples with the new reality of persistent conflict and technological disruption, one truth is clear: the defense industry is not just adapting to geopolitical risks; it is becoming a central force in shaping the future of global security.

Source:
[1] Defense Tech is at an Inflection Point [https://p72.vc/defense-tech/defense-tech-is-at-an-inflection-point-the-opportunities-challenges-and-innovations-shaping-the-sectors-future/]
[2] 2025 Aerospace and Defense Industry Outlook [https://www.deloitte.com/us/en/insights/industry/aerospace-defense/aerospace-and-defense-industry-outlook.html]
[3] Defense Industry Outlook Report 2025-2034 [https://www.businesswire.com/news/home/20250716552207/en/Defense-Industry-Outlook-Report-2025-2034-AI-and-Cyber-Warfare-Capabilities-Lead-Market-Growth---ResearchAndMarkets.com]
[4] Investing in Defense and Aerospace [https://www.morganstanley.com/articles/investing-in-defense-stocks]
[5] The defense tech ecosystem gives investors many [https://www.washingtontechnology.com/opinion/2025/04/defense-tech-ecosystem-gives-investors-many-opportunities/404521/]