Geopolitical Risk Premiums and the Reshaping of Defense and Cybersecurity Markets

The post-2022 geopolitical landscape has triggered a seismic shift in global defense and cybersecurity markets, driven by NATO's strategic repositioning in response to the Russian invasion of Ukraine and the ascendant threat from China. According to a report by the Stockholm International Peace Research Institute (SIPRI), global military expenditure surged to $2,718 billion in 2024, a 9.4% real-term increase from 2023—the steepest rise since the Cold War's endUnprecedented rise in global military expenditure as Europe and the Middle East spend surges^[2]. This surge is not merely a reaction to immediate crises but a recalibration of long-term strategic priorities, with NATO at the center of this transformation.

The NATO 5% GDP Target: A Catalyst for Defense Spending

At the 2025 NATO Summit in The Hague, Allies committed to allocating 5% of GDP to defense by 2035, with 3.5% dedicated to core military capabilities and 1.5% to infrastructure, cybersecurity, and other defense-related investmentsNATO's Eastern Flank and the Future of European Security^[1]. This target reflects a dramatic departure from the previous 2% guideline, which had been aspirational for decades. European members, particularly those along the eastern flank, have already accelerated their spending. Poland, for instance, increased its defense budget from 2.7% of GDP in 2022 to 4.2% in 2024, with projections of reaching 4.7% in 2025NATO's Eastern Flank and the Future of European Security^[1]. Germany, too, has committed to a 28% increase in its 2024 defense budget to $88.5 billionUnprecedented rise in global military expenditure as Europe and the Middle East spend surges^[2].

The European Commission's pledge of €150 billion in loans to support defense spending further underscores the region's pivot toward self-relianceIn Defense of Higher Spending: Geopolitics Creates Secular Opportunities^[5]. This shift is not merely about quantity but quality: investments are increasingly directed toward dual-use technologies, artificial intelligence, and space-based assets, as highlighted by the European Innovation Council and TechEU Scale-up FundNATO's Eastern Flank and the Future of European Security^[1].

Cybersecurity as a Strategic Pillar

NATO's 2022 Strategic Concept marked a pivotal moment by explicitly incorporating cyber incidents under Article 5 (collective defense) and emphasizing the need for investment in emerging technologiesIn Defense of Higher Spending: Geopolitics Creates Secular Opportunities^[5]. This has catalyzed a surge in cybersecurity spending. The 2025 Summit's 1.5% allocation for infrastructure and cyber resilience has provided NATO members with the financial flexibility to prioritize this domainEurope in the new NATO era^[3]. Initiatives such as the Virtual Cyber Incident Support Capability (VCISC) and the NATO Integrated Cyber Defence Centre, approved in 2024, aim to enhance situational awareness and coordination among alliesNATO's Eastern Flank and the Future of European Security^[1].

The global cybersecurity market has responded accordingly. According to a report by the International Institute for Strategic Studies (IISS), demand for advanced technologies like AI-driven cybersecurity solutions has spiked, driven by the convergence of cyber and kinetic operationsUnprecedented rise in global military expenditure as Europe and the Middle East spend surges^[2]. The rise of destructive cyberattacks, such as wiper malware, and hybrid influence campaigns has further elevated the sector's strategic importanceGeopolitical Factors Shaping the Future of the Cyber Domain^[6].

Geopolitical Risk Premiums and Market Volatility

The interplay between geopolitical risk and market dynamics is complex. While defense and cybersecurity stocks often act as defensive assets during crises, their performance is also influenced by the volatility of related sectors such as energy and critical raw materialsGeopolitical risk contagion across strategic sectors^[4]. For instance, the European military burden increased to 2.5% of GDP in 2024, up from 1.6% in 2022Unprecedented rise in global military expenditure as Europe and the Middle East spend surges^[2], reflecting the economic toll of sustained conflict and the need for resource-intensive modernization.

However, well-managed defense strategies could yield long-term economic benefits. A study by SUERF estimates that effective implementation of NATO's spending plans could boost euro area GDP by up to 3.4% by 2045Europe in the new NATO era^[3]. This suggests that while geopolitical risk premiums may elevate short-term volatility, they also create secular opportunities for investors who can navigate the sector's cyclical demands.

Investment Implications: Balancing Risk and Resilience

For investors, the defense and cybersecurity sectors present a duality of risk and resilience. On one hand, the surge in public spending has created a tailwind for companies specializing in next-generation technologies, such as satellite communications, quantum computing, and autonomous systems. On the other, the sector's performance remains contingent on the trajectory of geopolitical tensions and the efficiency of public-private partnerships (PPPs).

NATO's Defense Innovation Accelerator for the North Atlantic (DIANA) and the NATO Innovation Fund (NIF) are illustrative of this dynamic. By bridging the gap between defense organizations and private-sector innovators, these initiatives aim to accelerate the adoption of cutting-edge solutionsIn Defense of Higher Spending: Geopolitics Creates Secular Opportunities^[5]. Investors who align with firms participating in such partnerships may gain exposure to high-growth opportunities while mitigating some of the sector's inherent risks.

Conclusion

The post-2022 era has redefined the relationship between geopolitics and capital markets. NATO's strategic repositioning, characterized by unprecedented defense spending and a heightened focus on cyber resilience, has created a fertile ground for investment in defense and cybersecurity stocks. However, the sector's success will depend on the ability of governments and private actors to translate strategic intent into operational and technological superiority. For investors, the challenge lies in balancing the allure of long-term growth with the uncertainties of a rapidly evolving threat landscape.