Image source: Getty Images
Some of the best-performing UK stocks of 2025 were in the defence industry. But it looks like things might just be getting started – defence spending in the US could be set to rise sharply.
US President Donald Trump has proposed increasing the country’s military budget from $900bn to $1.5trn by 2027. And the likes of BAE Systems (LSE:BA) stand to benefit. But there’s a catch.
Military spending
There’s no doubt a 50% increase in military spending is a very positive sign for the major defence companies that supply the US. And BAE Systems is one of these.
The firm supplies munitions and combat vehicles to the US military. And it’s probably the UK company with the most to gain, so investors might well want to check it out.
The company is listed in the UK with its headquarters in London. But BAE’s largest market is the US as that’s where 45% of its revenues come from.
With significant operations across the Atlantic, including a number of factories, BAE is close to the action. The only thing is, it might be a bit too close for some investors.
Capital constraints?
One thing investors need to take note of is that at the same time as the spending announcement, Trump told US defence firms to halt dividends and share buybacks.
Instead, they’re being instructed to reinvest this into improving manufacturing efficiency and reliability. And this is something that might be relevant to BAE and its investors.
The company’s US operations might put it on the President’s radar. But at least it’s been investing heavily in its manufacturing facilities recently, which could turn out to be a smart move.
I think BAE Systems is the most obvious UK stock for investors wanting to get exposure to higher US defence spending to consider. But there’s also another name I have my eye on.
Cohort
Cohort (LSE:CHRT) is a much smaller UK defence firm. Where BAE Systems makes vehicles, it supplies things such as sensors and sonar systems for these – and other – major projects.
The firm’s cutting-edge products align well with Trump’s ambition to build a state-of-the-art military. But the company isn’t the largest or the most direct beneficiary and this creates risk.
Cohort’s size can make retaining top engineers and preventing them from joining bigger rivals a challenge. And it’s likely to be a bigger problem if they all have more money due to a higher defence budget.
The firm, however, has a strong order book and margins are expected to improve in the next six months. And that’s before any kind of boost from higher US spending.
Investing in defence
Ethical considerations understandably mean not every investor is interested in defence companies. But for those who are, a $1.5trn US defence budget is something to pay attention to.
UK defence companies, such as BAE Systems and Cohort, should stand to benefit. Each, however, comes with its own risks. .
My own view is that either might be worth considering as crucially, it looks as though defence is set to be a major investing theme again in 2026.
