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Global defense spending is rising as countries rebuild depleted stockpiles, expand weapons production, and adapt to drone-heavy warfare. Higher NATO targets, conflict-driven ammunition shortages, and new spending on drones and counter-drone systems point to a rearmament cycle that could last years. That buildup may influence government borrowing, industrial demand, inflation pressures, and bond yields across major economies over time.
Key Takeaways
Global military spending reached about $2.89 trillion in 2025, extending a multiyear global buildup. Spending is set to more than double to over $6.6 trillion by 2035, underscoring how far rearmament has already progressed.
Countries are rebuilding inventories depleted by conflict and years of limited production capacity. Ammunition, air-defense systems, missiles, and other complex equipment can take years to replace.
NATO members have committed to spend 5% of GDP on defense and security through 2035. That target adds to the spending growth already underway in Europe and the United States.
Drones are changing military economics by allowing low-cost systems to threaten far more expensive assets. Governments are responding by funding counter-drone defenses, sensors, and mass production.
Higher defense spending could keep demand firm for industrial capacity, energy, critical inputs, and government borrowing. It could also add to inflation pressure, though the scale will depend on how spending is financed and how long the buildup lasts.
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You can draw down inventory for years, telling yourself you’ll replace it eventually.
Then one day, the shelves are thin enough that replenishment becomes the whole job.
Factories have to ramp up. Supply chains have to catch up. Money needs to get spent. And replacing what was used can take years.
And during this phase – prices surge higher as demand outpaces supply.
That's exactly where global defense spending sits right now – in the middle of a potentially historic restock that is starting from (allegedly) empty warehouses.
What makes this even more interesting is that global military spending just hit ~$2.89 trillion in 2025 - the eleventh straight year of growth - and up in the last decade.
So it's not like there isn't money pumping into the sector. But the current run of global wars has called for a new phase in rearmament, because nations now burn through supplies faster than they can restock them.
But this isn't new.
It's actually the fifth wave since 1945, when NATO and its allies let spending and stockpiles run down during a peacetime lull, then got caught short when a real conflict burned through supplies far faster than anyone had planned for.
For context, back in 2023, NATO's own secretary general admitted2 that the alliance's ammunition stocks were being consumed many times faster than factories could replace them, with wait times on large-caliber shells stretching from 12 months to 28. A year later, the head of NATO's military committee shared that allies had been shipping weapons to Ukraine from half-empty warehouses - and that the bottom of the barrel was “already visible3”.
That's the pattern - decades of underspending leave the cupboard bare, and a real war exposes it.
Then to try and replenish everything, spending and investment soar.
That’s the wave.
And right now, the tide is rising.
The Defense Spending Wave: Drain, Restock, Recede
Defense spending – like any other economic cycle - moves in waves.
First comes the drain. A war, crisis, or years of underinvestment burns through inventory faster than factories can replace it. Ammunition runs low. Missile stockpiles shrink. Weapons systems wear down. And suddenly, the capacity that looked adequate during peacetime is nowhere close to enough.
Then comes the restock. Prices for weapons, ammunition, and commodities rise as demand runs ahead of supply. Governments place massive orders, factories rush to expand capacity, and spend the next several years trying to catch back up.
Finally, the wave begins to recede. Once armories are refilled, production has caught up, and the immediate threat feels less urgent, spending growth slows. Procurement falls back, sometimes for a decade or more.
Over time, readiness, spending, and inventories erode again.
Then the next crisis exposes the shortage, stockpiles drain, and the whole cycle repeats.
That's the whole model.
Drain. Restock. Recede.
Three stages, and this loop has repeated essentially four full times since WW2:
Korean War (1950–53): Military outlays more than tripled during the war - rising about 229%4 from 1950 to the 1953 peak - before beginning a post-armistice decline.
Vietnam War (1965–68): Outlays rose about 45% during the main buildup - then sank roughly 40% from the 1968 peak to its 1977 low.
Cold War (1978–85): Real military outlays increased about 47% from 1978 through 1985 during the peak of the “Second Cold War” – and started dropping after as tensions eased (significantly so after the USSR collapsed in 1991).
Post-9/11 (2001–11): Real outlays rose5 about 84% over the decade as the wars in Afghanistan and Iraq took hold - before falling back a bit as both wound down.
Each wave looked like the new permanent water level while it was cresting. But each one eventually broke anyway, as all cycles do (what goes up must come down, and vice versa).
Figure 1: Dunham (2026)
The key here is to notice how long each one took to build. These were all multi-year swells that outlasted noisy news cycles, elections, and most people's attention spans.
How Much Longer Could the Current (Fifth) Rearmament Wave Last?
Quite a bit, by the look of it.
Since the beginning of this decade, there have been two major factors that have forced the next wave.
The Russian-Ukraine war.
The U.S.-Iran war.
These two global wars – and the threat of China eventually invading Taiwan – have caught many nations off guard as they now rush to rearm.
For example, NATO6 members have committed to 5% of GDP on defense and security through 2035 (more than double current rates).
Figure 2: CaixaBank Research, 5% of GDP on defence: Why? What for? Is it feasible? (2025)
Keep in mind this is stacked on top of the post-2021 buildup that followed Russia's invasion of Ukraine – which saw EU member states (not including Russia, Ukraine, U.K.) defense spending surge from €259 billion to €454 billion in 2026 (a ~75% increase7).
Figure 3: Council of the European Union (2026)
But when you look at all of Europe, military spending rose814% in 2025 to $864 billion (most of that increase coming from Ukraine and Russia).
The point is, the European military beast has woken up – and there’s far more to come.
Meanwhile, Congress approved north of $1 trillion for fiscal 2026, and the FY2027 blueprint proposes9$1.5 trillion, a 44% jump the White House itself frames as exceeding the Reagan buildup (and this was before the recent depletion of critical munitions in the Iran war).
Then in the East, China’s military spending keeps rising – up 7% year-over-year – and hitting a record high of $277 billion for 2026.
Every version points in the same direction – that the wave is swelling higher.
And if the trend holds, the UN puts 2035 spending as high as $6.6 trillion - roughly double10 today's total.
Why Drones Change the Economics of Modern Warfare
There's always a new technology that triggers the next wave of defense spending.
Tanks did it. Fighter jets did it. Aircraft carriers, cruise missiles, and nuclear weapons all did it.
Each invention sparks a rearmament race - because no nation lets a rival advance without matching it.
And building around each of those inventions meant rebuilding factories for hardware that took years to design and years more to produce. That's part of why the old waves took so long to crest.
But over the last few years – the entire military-industrial complex was thrown upside down.
Why? Because of drone warfare
They're cheap, expendable, and fast enough to build that they don't need a decade-long wave to show up in force.
Ukraine and Iran have both already proved that drones can do just as much economic and physical damage as far more expensive missiles can do at a fraction of the cost.
For example, a single Patriot interceptor runs somewhere between $3 million and $4.2 million – yet an Iranian Shahed-136 attack drone costs an estimated $20,000 to $50,000 to build.
That's a cost exchange running anywhere from 80-to-1 to over 200-to-1 against the side doing the shooting down, and it gets worse the more drones show up in a single wave (since a defender can't fire one $4 million missile at twelve $20,000 threats and think it’s sustainable).
After watching that play out in two different wars, the Pentagon's new Defense Autonomous Warfare Group11 (DAWG; basically drones) is requesting $54.6 billion for FY2027 - up from just $225 million in FY2026.
That’s a jump of roughly 24,000%.
Figure 4: Dunham (2026)
That one-line item alone would exceed half of the United Kingdom's entire annual defense budget.
Nobody spends a number like that because a think tank wrote a nice report – but because something on an actual battlefield forced their hand.
I’m talking about the future of asymmetric warfare.
What Is Asymmetric Warfare?
Asymmetric warfare means a fight between two sides with wildly mismatched resources, where the weaker side skips a conventional fight it would lose and finds a cheap way to inflict expensive damage instead.
Think of it like a hornet against a bear. The bear wins any fight that plays by size rules. But a hornet doesn't need size to inflict pain. It needs speed, numbers, and a soft spot to sting. Enough hornets, and the bear runs - even though it could crush any single one of them without trying.
Drones are the hornets of modern war - and two recent conflicts just proved the sting works against two of the biggest bears on the planet.
Ukraine is the case everyone knows.
Russia expected Kyiv to fall within days in 2022. Instead, Ukraine - fighting a military many times its size and budget - now attributes more than 80% of destroyed enemy targets to drones - the vast majority built domestically - and most of them cheap first-person-view drones costing a few hundred to a few thousand dollars apiece. Cheap, mass-produced hardware fought a much larger conventional army to a standstill that has now lasted years.
Now Ukraine is launching drones directly inside Russia – some even hitting targets in Moscow - and causing serious damage.
For instance, cheap drone strikes on Wildberries (Russia's largest online retailer; basically its Amazon), have destroyed or disabled more than a quarter of its warehouse capacity - with total losses to the company and its sellers estimated12 at $6 billion to $8.5 billion.
Iran is the new case that’s highlighting asymmetric warfare.
When the U.S. and Israel launched their bombing campaign in early 2026, Washington also expected a fast collapse, the same way Moscow once expected a fast collapse of Kyiv. But it didn't happen. Instead, Iran answered with waves of cheap, one-way attack drones and ballistic missiles fired at bases across the entire region and closed the Strait of Hormuz (where 25% of global energy flowed through).
Why? The idea was that by overwhelming U.S. allies with cheap drones and sending oil prices higher – it would cost too much13 for the U.S. to continue (there are also rumors that the U.S.'s critical munitions have been dangerously depleted).
Two wars in two different regions each taught one lesson - a much weaker side can bleed a far stronger one using hardware that costs a rounding error next to a fighter jet.
That's why the Pentagon just moved a budget line 24,000% in one year (NATO also launched the Drone Edge Initiative14, committing over $40 billion toward counter-drone technology and operator training over five years).
They see where warfare is likely headed and want to be ready.
And that’s a lot of money and capacity that’ll scale up to meet it.
Where Does That Leave Us?
Keep in mind this is just scratching the surface - and there are far more variables. But the rearmament wave framework still works.
Drain, restock, recede - five-for-five times since 1945 - and every prior wave ran for the better part of a decade once it started building.
Nothing about this cycle's size or its 11-year head start argues for an early crest. Actually, with the current surge in European/NATO spending targets and the U.S. rearmament cycle, things may actually be just beginning.
But what’s important is that these things come with lag effects. Meaning if defense outlays remain debt-financed and production bottlenecks persist, the buildup could add to demand for industrial capacity, inflation, and place pressure on fiscal borrowing needs and long-term yields.
But eventually tempers will cool, and the wave will break. It usually does, years down the line, once the stockpiles are actually full again and modern militaries adapt to new technologies.
But for now, surfs up.
Take care.
FAQ
Why is global defense spending rising? Global defense spending is rising as countries rebuild depleted ammunition and weapons stockpiles, increase military readiness, and expand production capacity. Active conflicts, higher NATO spending targets, and growing demand for drones and counter-drone systems are also pushing budgets higher.
What is the global rearmament cycle? The global rearmament cycle is the period after a war or security shock when governments raise defense spending to replace equipment, replenish stockpiles, and expand industrial capacity. It can last for years because ammunition, missiles, air-defense systems, factories, and trained workers take time to scale.
What does NATO’s 5% defense spending target mean? NATO allies committed to invest 5% of GDP annually in defense and security-related spending by 2035. The target includes at least 3.5% of GDP for core defense needs and up to 1.5% for areas such as infrastructure, cyber defense, civil preparedness, and the defense industrial base.
Why are drones changing military spending? Drones are changing military spending because relatively low-cost systems can threaten expensive targets and force defenders to use costly interceptors, sensors, and air-defense systems. Governments are increasing spending on drones, counter-drone technology, electronic warfare, and the industrial capacity needed to produce them.
Could higher defense spending affect inflation and bond yields? Higher defense spending can increase government borrowing and demand for energy, metals, manufacturing capacity, and skilled labor. Those pressures can add to inflation risk and affect long-term bond yields, particularly when supply is constrained. The impact will depend on the size, timing, and financing of the spending.
Sources
CNBC — Global Military Spending Hit a Record $2.89 Trillion in 2025 [cnbc.com]
NATO — NATO Secretary General: We Must Go Further and Faster to Procure Key Capabilities and Boost Stockpiles [nato.int]
Reuters — NATO Urges Arms Production Boost as Warehouses Half Full [reuters.com]
Dunham — Petrodollar Recycling and Strait of Hormuz Risk [dunham.com]
NATO — NATO Allies Invest $40 Billion in Counter-Drone Capabilities and Drone Training [nato.int]
Disclosures
This communication is general in nature and provided for educational and informational purposes only. It should not be considered or relied upon as legal, tax or investment advice or an investment recommendation, or as a substitute for legal or tax counsel. Any investment products or services named herein are for illustrative purposes only and should not be considered an offer to buy or sell, or an investment recommendation for, any specific security, strategy or investment product or service. Always consult a qualified professional or your own independent financial professional for personalized advice or investment recommendations tailored to your specific goals, individual situation, and risk tolerance. All examples are hypothetical and are for illustrative purposes only.
Information contained in the materials included is believed to be from reliable sources, but no representations or guarantees are made as to the accuracy or completeness of information. This document is provided for information purposes only and should not be considered as investment advice.
Dunham & Associates Investment Counsel, Inc. is a Registered Investment Adviser and Broker/Dealer. Member FINRA/SIPC. Advisory services and securities offered through Dunham & Associates Investment Counsel, Inc.
