Geopolitical Risk and Market Volatility: Trump's National Security Strategy and Its Impact on Tech and Defense Sectors

The Trump administration's 2017–2021 national security strategy, anchored in the "America First" doctrine, reshaped U.S. foreign policy and economic priorities. This shift-emphasizing non-interventionism, reindustrialization, and technological dominance-had profound implications for global markets, particularly in the defense and technology sectors. By recalibrating military focus to the Western Hemisphere, tightening supply chains, and fostering a transactional approach to alliances, Trump's policies created both volatility and opportunity for investors.

Defense Sector: Tariffs, Spending, and Strategic Reallocation

The Trump administration's emphasis on securing critical supply chains and bolstering the defense-industrial base directly influenced market dynamics. Tariffs imposed on steel and aluminum imports in 2018, justified under Section 232 of the Trade Expansion Act for national security reasons, triggered negative abnormal stock returns for defense contractors like Lockheed Martin and L3Harris Technologies. These measures, while aimed at protecting domestic industries, introduced uncertainty, as investors questioned their long-term viability and potential retaliatory actions from trading partners.

However, the administration's broader strategic pivot-reducing U.S. military presence in the Middle East and redirecting resources to Latin America-spurred increased defense spending in Europe. Heightened tensions with Russia and China, coupled with Trump's calls for NATO allies to shoulder greater defense burdens, led to surges in defense stock performance. For instance, European defense giants like Airbus and BAE Systems saw improved returns as countries like Germany and Poland ramped up military budgets.

Tech Sector: Innovation, Deregulation, and Geopolitical Tensions

Trump's strategy prioritized technological dominance, particularly in artificial intelligence (AI), semiconductors, and quantum computing. This focus fueled a dual-edged market environment. On one hand, regulatory ambiguity and trade wars with China created volatility. For example, Trump's confrontational stance toward Beijing led to episodic market jitters, as investors grappled with the risks of supply chain disruptions and export controls.

On the other hand, the administration's push for homegrown innovation catalyzed growth in key tech sectors. The AI-driven rally, for instance, significantly boosted Big Tech stocks like Apple and Alphabet, as investors anticipated continued advancements in machine learning and automation. Additionally, Trump's deregulatory agenda-advocating for reduced oversight and lower interest rates-created favorable conditions for venture capital investment in defense tech. By 2021, venture funding in the defense technology sector had surpassed $100 billion, driven by rising geopolitical tensions and the need for cutting-edge military solutions.

Geopolitical Risk and Market Resilience

Trump's policies also amplified geopolitical risk metrics, particularly in Europe and the Indo-Pacific. The administration's isolationist rhetoric and demands for burden-sharing strained relationships with traditional allies, heightening uncertainty in global markets. For example, U.S. defense stocks fell when Trump hinted at diplomatic progress in the Ukraine-Russia conflict, signaling potential reductions in long-term military procurement needs.

Yet, the defense sector emerged as a hedge against geopolitical volatility. A 2024 study found that innovation had a more pronounced effect on defense stock returns than geopolitical risk (GPR) itself, with U.S. defense companies serving as a robust buffer during periods of uncertainty according to a study. This resilience was further underscored by record global defense spending, with over 100 countries increasing budgets in 2024.

Conclusion: Navigating the New Normal

The Trump administration's national security strategy underscored the interconnectedness of geopolitics and markets. While its policies introduced volatility-through tariffs, regulatory shifts, and reallocated military priorities-they also spurred innovation and investment in critical sectors. For investors, the key takeaway lies in balancing risk and opportunity: defense stocks offer resilience amid geopolitical uncertainty, while tech sectors present growth potential in an era of strategic competition. As the U.S. continues to recalibrate its global role, understanding these dynamics will remain essential for navigating market turbulence.