3 reasons aerospace and defense stocks could surge the rest of this year

As usual during volatile geopolitical times, the aerospace and defense industry is thriving right now, with the benchmark S&P Aerospace and Defense Select Industry Index up 44% so far in 2025, well ahead of the broader S&P 500 Index, which has returned 10.3% over the same time period.

With such a high YTD performance figure, some market mavens may argue that the defense sector valuations are borderline high (or more) and that recent mammoth U.S. federal budget outlays and general sector growth are already priced into the mix. Even so, the data suggests that there’s still plenty of meat on this market's bone, and sector experts agree, noting that the aerospace and defense sector's runway leaves ample room for growth.

These three reasons help make the case for aerospace and defense stocks and funds in the second half of 2025.

1. Global air traffic data points to a 5.8% boost in 2025 air passenger traffic, according to the International Air Transport Association. That, plus robust demand for passenger and defense-linked aircraft, helps hike short-term and long-term growth for the aerospace industry.
2. The defense spending portion of the recently enacted "One Big Beautiful Bill Act" (OBBB) federal budget injects $156.2 billion in new funding for national security and defense priorities. That figure stands in addition to the ongoing U.S. annual defense budget and is available until September, 2029. 
3. Historically, the military and defense industries have one client, and it’s a big one. Uncle Sam holds a treasure chest of funds (2025 defense spending clears $849 billion), consistently prioritizes the defense of the U.S., and usually pays its bills on time. That scenario offers significant reliability; the finances of the aerospace and defense sectors are likely to remain relatively stable for decades to come. Not too many market sectors can say the same thing.

“The OBBB Act provides over $150 billion in defense funding,” said Michael Martin, vice president of market strategy at Trading Block, a Chicago-based digital brokerage firm. “This covers shipbuilding, aircraft, missile defense, weapons and munitions, and more." He added, “There’ve been a few non-war times when the defense sector has gotten such a boost.”

Other market experts point specifically to the enacted Omnibus Budget and Business Bill (OBBB), which bolsters federal spending on defense modernization, infrastructure, and commercial aerospace recovery.

“This creates a favorable environment for investors, with opportunities stemming from increased government contracts, rising global defense budgets, and a rebound in commercial air travel post-pandemic,” said Tony Bancroft, a former Marine pilot and now a portfolio manager and aerospace and defense analyst at Gabelli Funds. “The sector’s resilience is underpinned by long-term contracts and predictable revenue streams, particularly in defense, while commercial aerospace benefits from pent-up demand for new aircraft and supply chain stabilization.”

Bancroft focuses on particular investments in two aerospace and defense sectors.

“The OBBB allocates significant funding for next-generation technologies like hypersonics, drones, and cybersecurity, benefiting U.S. defense companies,” he noted. “Additionally, with air travel demand surpassing pre-COVID levels, manufacturers like Boeing and material suppliers like Hexcel and Albany International are poised for growth.”

As usual on Wall Street, there are several caveats on specific defense sector investing, and Bancroft notes four of them.

1. Geopolitical uncertainty. Escalating global tensions could disrupt supply chains or shift defense priorities. “That could impact a smaller player,” Bancroft said.
2. Inflation and costs. Rising raw material and labor costs could squeeze margins. “That’s particularly the case for commercial aerospace firms,” he added.
3. Regulatory hurdles. OBBB-related funding may come with stringent compliance requirements, which can increase operational costs.
4. Market volatility. A&D stocks are sensitive to macroeconomic shifts, and “broader market correction could overshadow sector-specific gains,” Bancroft said.

“Overall, I’m bullish on defense as a whole, but for investors, the real edge will be separating the companies with long-term contracts and execution strength from those simply riding the wave,” Bancroft added.

These three aerospace and defense stocks offer solid potential right now

While investors should conduct their own robust due diligence before investing in often complex defense industry stocks, market experts advise starting with these market names.

1. Hexcel Corporation (HXL). Hexcel is a leader in advanced composites, critical for lightweight, fuel-efficient aircraft. “Its exposure to both commercial (e.g., Boeing 737 MAX, Airbus A320neo) and defense programs positions it to benefit from OBBB-driven demand,” Bancroft said. “Recent valuation metrics suggest HXL trades at a discount relative to its growth prospects, especially with composites demand rising.”
2. Boeing Company (BA). As a cornerstone of the commercial and defense aerospace industries, Boeing benefits from OBBB’s potential boost to defense budgets and a recovering commercial aviation market. “Despite past challenges, its order backlog and focus on quality control make it a long-term winner, with shares potentially undervalued given its market leadership,” Bancroft noted.
3. Lockheed Martin Corporation (LMT). A defense titan, Lockheed’s portfolio (F-35 program, missile defense systems) aligns directly with OBBB-driven modernization. “Its stable dividends and consistent government contracts appeal to risk-averse investors, with current valuations offering a reasonable entry point,” Bancroft added.

These three exchange-traded funds are worth a closer look

Defense-sector investors, especially new market players who haven’t thoroughly vetted the sector, can fund safety in numbers with diversified ETFs.

“The best way to benefit from the OBBB defense spending is to cast a wide net,” Martin said. “I’m a big proponent of ETF investing, especially with defense funding set to flow across so many industries.”

Three of Martin’s favorite defense sector ETFs with decent liquidity include the iShares U.S. Aerospace & Defense ETF (ITA), the Invesco Aerospace & Defense ETF (PPA), and the SPDR S&P Aerospace & Defense ETF (XAR). Here’s a snapshot of each fund.

1. iShares U.S. Aerospace & Defense ETF (ITA). This fund has a 0.38% expense ratio and has returned over 38% the past year, making it a strong choice for broad exposure to the biggest contractors. “The ETF has 41 holdings, with top weightings including GE (21%) and RTX (15%),” Martin said.
2. Invesco Aerospace & Defense ETF (PPA). This ETF carries a 0.50% fee and has returned over 34% in the past year. Big names include BA (8%), GE (8%), and RTX (8%). “Compared to ITA, PPA is more diversified across weightings and market caps, including both mid and large caps, while ITA is concentrated mostly in large-cap stocks,” Martin noted.
3. SPDR S&P Aerospace & Defense ETF (XAR). This fund has a 0.35% expense ratio and has returned over 44% in the past year, making it the top performer among its peers. “Unlike ITA and PPA, XAR uses an equal-weight strategy across its 40 current holdings, which gives smaller-cap companies as much influence as the industry giants,” Martin added.

What factors should investors consider?

The most important takeaway from investing in defense companies is to focus like a laser beam on the fundamentals. Additionally, as Martin points out, it’s also important to recognize that all of this could change on a dime with a new administration, so it is essential to stay agile.

“Investing in sectors is not a passive game,” he added. “You have to stay on your toes, particularly in 2025. Don’t be afraid to take profits, and know when to throw in the towel.”

Also, key factors such as defense-industry contract backlogs, substantial revenues, exposure to OBBB funds, dividend opportunities, and valuation metrics can help investors balance a stock or fund’s growth potential with risk management.

“For instance, the OBBB amplifies opportunities but doesn’t eliminate sector-specific challenges like cost pressures or geopolitical risks,” Bancroft said. “By focusing on companies with strong fundamentals, diversified revenue, and alignment with policy-driven growth, investors can capitalize on the sector’s 'hot spot' status while managing downside risks.”