Geopolitical Risk and Defense Sector Opportunities: U.S.-Turkey Dynamics and the F-35 Conundrum

The interplay between U.S.-Turkey defense relations and the global defense sector has emerged as a pivotal driver of investment opportunities and risks in 2025. At the heart of this dynamic lies the contentious F-35 procurement program, which has become a litmus test for the resilience of transatlantic alliances and the adaptability of defense contractors. As Turkey navigates a dual strategy of reengaging with U.S. defense systems while diversifying its procurement with European platforms, the implications for companies like Lockheed Martin and BAE Systems—and broader emerging market trends—demand careful scrutiny.

U.S.-Turkey F-35 Negotiations: A High-Stakes Reconciliation

The U.S. exclusion of Turkey from the F-35 program in 2020, following Ankara's acquisition of Russia's S-400 missile system, created a geopolitical rift with cascading economic consequences. However, recent high-level talks between President Donald Trump and Turkish President Recep Tayyip Erdogan suggest a potential thaw. According to a report by Reuters, Trump has signaled openness to revisiting the sanctions, contingent on resolving the S-400 issue At White House, Erdogan to seek deal with Trump on F-35s^[1]. This development has reignited speculation about Turkey's reentry into the program, with Ankara reportedly seeking either a production share in the F-35 or the outright purchase of 40 jets US Congress may reconsider F-35 sales to Türkiye^[2].

The stakes for Lockheed Martin, the prime contractor for the F-35, are significant. A resumption of Turkish participation could inject billions into the program, which has already faced delays due to modernization efforts like Technology Refresh 3 F-35 Joint Strike Fighter: - U.S. Government Accountability Office^[3]. However, U.S. Congress remains a wildcard, with lawmakers resisting sanctions relief over concerns about Turkey's regional posture and ties to Moscow U.S.–Turkey Defense Talks: Erdogan’s Push for F-35s Tests Sanctions and Alliance Politics^[4].

Impact on Defense Contractors: Diversification and Vulnerability

While the F-35 negotiations dominate headlines, Turkey's parallel procurement of Eurofighter Typhoons from a European consortium involving the UK, Germany, and Italy underscores a strategic shift. This deal, valued at €8–10 billion, has direct implications for BAE Systems, which produces 37% of each Eurofighter in the UK Turkey signed deal with UK and Germany to purchase 40^[5]. The contract not only sustains 20,000 UK jobs but also positions BAE to benefit from recurring revenue streams in maintenance and training Turkey signed deal with UK and Germany to purchase 40^[5].

For Lockheed Martin, the situation is more complex. The U.S. sanctions imposed in 2020 disrupted its Turkish Utility Helicopter Program (TUHP), leading to operational delays and financial strain US sanctions on Turkey's defense sector deliver deeper blow^[6]. A return to the F-35 program could mitigate these losses, but the company's exposure to geopolitical volatility remains a risk. Similarly, European firms like Leonardo (Italy) and Airbus (Spain), which also supply Eurofighters, stand to gain from Turkey's procurement, highlighting the sector's growing regionalization.

Emerging Market Implications: Volatility and Opportunity

The U.S.-Turkey defense dynamic extends beyond bilateral relations, influencing broader emerging market trends. Turkey's $10 billion defense investment—encompassing F-35s, Eurofighters, and domestic projects like the KAAN fighter jet—signals a surge in regional defense spending. According to a Bloomberg analysis, this spending could catalyze a 15% annual growth in Turkey's defense industry, attracting foreign direct investment and boosting local contractors like Turkish Aerospace Industries (TAI) Turkey plans to buy hundreds of Boeing airliners and^[7].

However, the path is fraught with uncertainty. If the U.S. Congress blocks F-35 sales, Turkey may accelerate its pivot to European and domestic platforms, potentially reshaping global defense trade flows. This scenario could benefit emerging market firms in India, South Korea, and the UAE, which are also expanding their aerospace capabilities Defense Market Quarterly Review – May 2025^[8]. Conversely, a successful U.S.-Turkey deal could stabilize NATO's eastern flank and reduce regional tensions, indirectly supporting defense stocks in Europe and Asia.

Regional Defense Spending Trends: A New Equilibrium

The Eurofighter procurement and F-35 negotiations reflect a broader recalibration of defense alliances. Germany's reversal of its opposition to the Eurofighter sale—under Chancellor Friedrich Merz—illustrates Europe's growing assertiveness in defense matters, driven by Russia's invasion of Ukraine and skepticism about U.S. commitments Türkiye's Eurofighter Typhoon deal marks strategic^[9]. This shift could spur similar procurement strategies in other NATO members, creating opportunities for European defense contractors.

Meanwhile, Turkey's emphasis on indigenous projects like the KAAN and HÜRJET trainer jets underscores a global trend toward self-reliance in defense. As noted by Defense Update, this trend is likely to accelerate in 2025, with countries in Southeast Asia and the Middle East prioritizing local production to mitigate supply chain risks Turkey’s Eurofighter Procurement Plans Gain Momentum^[10].

Conclusion: Navigating the Crossroads of Geopolitics and Investment

The U.S.-Turkey F-35 saga and Turkey's Eurofighter procurement highlight the intricate link between geopolitical risk and defense sector opportunities. For investors, the key lies in balancing exposure to high-growth defense contractors like Lockheed Martin and BAE Systems with hedging against political uncertainties. Emerging markets, particularly those with robust defense industrial bases, offer compelling long-term potential but require careful monitoring of regional dynamics.

As the U.S. and Turkey navigate this high-stakes negotiation, one thing is clear: the defense sector's future will be shaped not just by technological innovation, but by the delicate art of geopolitical diplomacy.