NATO's Defense Surge: A Playbook for Infrastructure and Cybersecurity Winners

The NATO summit in The Hague in June 2025 marked a seismic shift in defense spending priorities, with allies agreeing to allocate 5% of GDP to defense by 2035—a 75% increase from 2014 levels. While the focus has historically been on traditional military capabilities, the 1.5% GDP carve-out for security-related infrastructure and cybersecurity represents a goldmine for investors. From hardened transport networks to cyber defense systems, companies positioned to address these priorities stand to benefit as Europe's defense spending hits a 30-year high. Yet risks loom large: escalating U.S.-Iran tensions and the specter of NATO fragmentation could upend this opportunity. Here's how to navigate it.

The 1.5% Allocation: A Blueprint for Infrastructure and Cyber Firms

The 3.5% of GDP allocated to "core defense"—fighter jets, tanks, and missiles—has been well-documented. But the 1.5% security investment target is the hidden growth driver. This component funds:
- Military-ready transport networks: Upgrading railways, roads, and ports to enable rapid troop deployments (e.g., Baltic states' rail modernization).
- Energy and pipeline protection: Securing critical infrastructure against sabotage or cyberattacks.
- Cybersecurity systems: Protecting defense grids, communication networks, and industrial control systems.

European defense spending is already surging. Germany's 2024 budget rose 28% to €88.5 billion, while Poland allocated €38 billion (4.2% GDP). The Baltic states aim to hit 5% GDP by 2030, with Latvia and Lithuania targeting upgrades to their transport and energy systems. Thales Group (EPA:HO) and Hexagon AB (HEXA.ST)—both leaders in defense infrastructure—are prime beneficiaries. Thales's rail security systems and Hexagon's precision navigation tech for logistics networks are critical to NATO's mobility goals.

For cybersecurity, Palo Alto Networks (PANW) and CrowdStrike (CRWD) are top picks. CrowdStrike's Falcon platform, used by U.S. and European governments, is ideal for defending against state-sponsored cyberattacks. European firm Darktrace (DARK.L), which specializes in AI-driven threat detection, is also well-positioned as NATO members prioritize real-time cyber resilience.

Risks: Geopolitical Volatility and NATO Fragmentation

The upside is tempered by two major risks. First, U.S.-Iran tensions threaten to divert spending from infrastructure to immediate crisis management. A new conflict in the Middle East could disrupt supply chains and trigger volatility in defense stocks.

Second, NATO's cohesion is fraying. Spain's exemption from the 5% target (opting for 2.1% GDP) highlights intra-alliance tensions. Italy and Belgium, struggling with budget deficits, may delay infrastructure investments. If fragmentation deepens, project backlogs could hurt firms reliant on steady contracts.

Investment Play: Target European Exposure, Avoid Middle East Entanglements

The optimal portfolio leans into European defense contractors and cybersecurity leaders, while avoiding companies exposed to U.S.-Iran dynamics.

• Buy:
• Thales Group (EPA:HO): 40% of revenue tied to European military infrastructure.
• Palo Alto Networks (PANW): 55% of government contracts are NATO members.

• Saab AB (SAAB.ST): Swedish firm leading in air defense systems and cyber solutions.

• Avoid:

• Raytheon Technologies (RTX): Overexposed to U.S. geopolitical risks.

• Lockheed Martin (LMT): Heavy reliance on U.S. budget cycles, which may face cuts if fiscal hawkishness resurges.

• Monitor:

• Darktrace (DARK.L): Rising European cybersecurity star, but dependent on regulatory clarity.

Bottom Line: A Divided NATO Needs Infrastructure, But Risks Remain

NATO's defense spending boom is real—but uneven. Investors must focus on firms with direct ties to infrastructure and cybersecurity upgrades, while hedging against geopolitical tailwinds. The 1.5% GDP allocation is a structural tailwind, but Spain's exemption and Middle East instability remind us that alliances can fray. For now, the playbook is clear: allocate to European defense and cybersecurity leaders, but keep one eye on the headlines.

The next 12 months will test whether NATO's spending targets are more than a political promise—and whether investors can profit from the gap between ambition and execution.