Low-cost military technology demand surges, small and medium-sized defense stocks in the US outperform the S&P 500 and military giants within the year.

This year, the stock prices of small and medium-sized defense companies in the United States have risen significantly, outperforming their larger competitors. This is because global conflicts and the priority of the Pentagon have driven the demand for military systems that are lower in price and more adaptable, such as AI-driven drones and unmanned vehicles. In 2025, the NYSE Arca Defense Index rose by 34%, far surpassing the 12% increase in the S&P 500 index. Among them, companies like Kratos Defense & Security Solutions, Inc. (KTOS.US), AeroVironment (AVAV.US), Astronics (ATRO.US), and Mercury Systems (MRCY.US) performed exceptionally well. In the Pentagon's proposed budget for the fiscal year 2026, a budget of nearly $60 billion was allocated for drones and anti-drone systems, almost double the amount allocated last year. This indicates a gradual decrease in investment in traditional projects such as warships and combat aircraft. Analysts suggest that this trend is favorable for companies that can produce modular, software-driven weapons that can be rapidly deployed. Mergers and acquisitions, as well as venture capital, are also flowing into this sector, although transaction amounts are relatively low. In 2025, startups in the aerospace and defense sector raised over $14 billion, the highest amount in at least a decade, as investors are optimistic about companies that can provide next-generation systems for modern battlefields.