The Impact of Prolonged U.S.-China Geopolitical Tensions on Defense and Tech Sectors

The escalating rivalry between the United States and China has catalyzed a defense and technology spending supercycle, reshaping global investment landscapes. As both nations prioritize conflict preparedness, investors must strategically position themselves in sectors poised to benefit from this prolonged geopolitical tension.

Defense Budgets: A Barometer of Strategic Priorities

The U.S. defense budget for fiscal year 2025 reached $851.7 billion, a 3.3% increase from 2024, reflecting heightened focus on countering China's military expansion and regional assertiveness, according to an ORF analysis. This aligns with broader global trends: SIPRI reported that global military spending hit $2.44 trillion in 2023, with the U.S. accounting for 37.5% of the total. Meanwhile, China's 2025 defense budget of $249 billion-a 7.2% rise-emphasizes modernizing the People's Liberation Army (PLA) and advancing capabilities in stealth aircraft, aircraft carriers, and nuclear arsenals (the ORF analysis cited above). Despite China's lower GDP share (1.5% vs. the U.S.'s 3.4%), its budget prioritizes technological parity, particularly in AI and quantum computing, as noted in a Channel NewsAsia report.

This dual escalation underscores a shift from traditional military spending to investments in asymmetric warfare, including cyber capabilities and autonomous systems. For investors, defense contractors like Lockheed Martin, Northrop Grumman, and RTX are prime beneficiaries, with European allies also ramping up procurement to fill capability gaps (see the ORF analysis referenced earlier).

Tech Sectors: The New Frontline of Geopolitical Competition

The U.S. has imposed stringent export controls on semiconductors and advanced AI chips, aiming to stifle China's access to tools for military modernization, according to a WWDefcon analysis. Conversely, China's $98 billion AI investment in 2025-$56 billion from public funding-highlights its state-led push for self-reliance, with applications spanning surveillance, logistics, and autonomous warfare, according to TechwireAsia.

Quantum computing is another battleground. China's National Lab for Quantum Information Science has produced more research papers annually than the U.S. since 2022, while its 12,000-kilometer quantum communication network and 72-qubit superconducting quantum computer signal strategic depth (as reported in the ORF analysis). The U.S. responds with initiatives like DARPA's Quantum Scaling Initiative and Google's Willow chip, but China's rapid progress in quantum cryptography and code-breaking poses long-term risks (see the Channel NewsAsia report referenced above).

Investment Opportunities: Startups, ETFs, and Policy-Driven Gains

The defense-tech sector is witnessing a surge in innovation-driven startups. Companies like Anduril Industries (hypersonic propulsion), Scale AI (military LLMs), and Firestorm (3D-printed drones) are leveraging U.S. defense contracts to scale rapidly, as noted in a Mike Kalil list. Established firms such as Palantir and Booz Allen Hamilton are also pivoting toward AI and autonomy, securing billions in Pentagon contracts (mentioned in the same Mike Kalil list).

For diversified exposure, ETFs like the iShares U.S. Aerospace & Defense ETF (ITA) and Invesco Aerospace & Defense ETF (PPA) offer access to a basket of defense primes and tech enablers. BlackRock has highlighted space-tech startups as a high-growth niche, given the strategic importance of satellite networks in modern warfare (see the Channel NewsAsia report referenced above).

However, investors must navigate policy risks. U.S. export controls have reduced semiconductor revenue for firms like ASML and TSMC, while China's retaliatory measures-such as mineral export bans and dual-use export restrictions-could disrupt global supply chains, as discussed in the WWDefcon analysis referenced earlier. India and the EU are emerging as alternative hubs, with India's $10 billion semiconductor incentive package and the EU's €43 billion Chips Act aiming to reduce dependency on U.S. and Chinese suppliers (see the WWDefcon analysis cited above).

Strategic Positioning for Long-Term Conflict Preparedness

To capitalize on this era of geopolitical fragmentation, investors should adopt a dual strategy:
1. Defensive Exposure: Prioritize established defense contractors with contracts tied to AI, cyber, and space systems. These firms benefit from stable, inflation-protected budgets.
2. Growth Leverage: Invest in tech startups and ETFs focused on semiconductors, quantum computing, and AI, which are central to the U.S.-China tech war.

Policy shifts will remain a wildcard. The U.S. and its allies may expand export controls or form anti-China tech blocs, while China's self-reliance push could accelerate domestic innovation. Investors must balance these dynamics with a focus on resilience-diversifying supply chains and hedging against regulatory overreach.

In conclusion, the U.S.-China rivalry is not merely a geopolitical contest but a catalyst for structural shifts in defense and tech markets. By aligning portfolios with the strategic priorities of both nations, investors can navigate volatility while capitalizing on the next decade's most transformative trends.