What this chart shows
This chart shows NATO members’ estimated defence expenditure as a percentage of GDP for 2024. The orange dashed line shows NATO’s long-standing 2% guideline, while the blue line shows the alliance’s newly agreed pledge to allocate 5% of GDP to defence, and resilience and security, by 2035. Although the new target is non-binding, it marks a significant shift in tone. The US, Poland and other countries close to Russia continue to lead in defence spending, while countries like Spain and Belgium remain well below target. Notably, Spain negotiated an exemption from the 5% pledge ahead of the summit, citing political and fiscal constraints. The announcement, made at the NATO meeting in the Netherlands last week, triggered a fresh rally in European defence stocks, with the MSCI Europe Aerospace and Defence index up 5%* over the summit days and almost 70%* year-to-date.
*in USD terms as at 26th June 2025
Why this is important
The renewed commitment to defence spending comes amid rising geopolitical tensions and concerns that the US could scale back its support for NATO. Investors have been rotating into European defence names, encouraged by increased ETF issuance and a growing belief that increased government spending will support long-term sector growth. That said, the sector’s recent rally has been largely driven by sentiment. With many NATO countries under fiscal pressure, delivering on the 5% pledge may prove challenging, suggesting this may mark a near-term peak in optimism. Even so, the strategic shift in defence policy is the most significant since the Cold War, and the emergence of governments as dominant buyers has provided a powerful tailwind. Defence stocks are highly sensitive to geopolitical tensions and conflict escalations, as seen after the invasions of Ukraine in 2022 and Israel in 2023. With ongoing conflict risks still to be resolved, the sector remains tightly linked to any geopolitical developments.
Market sentiment was buoyed by hopes for better trade relations, especially the US/China rare‑earth deal and extensions to temporary tariff relief, helping lift global equities to record levels. However, this optimism was tempered by growing worries over US long‑term sovereign debt outflows, highlighting growing investor concerns about fiscal sustainability and pent-up inflation risk.
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The S&P 500 and Nasdaq reached record highs, powered by optimism over fresh US/ China trade deals and potential Federal Reserve rate cuts.
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Federal Reserve held interest rates at 4.25–4.50%, signalling possible two quarter point rate cuts later in 2025.
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The Fed proposed cutting the enhanced supplementary leverage ratio for big banks to 3.5%-4.5%, partly granting lenders’ calls to exclude assets like Treasuries from the calculation.
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US housing starts dropped ~10% in May, the lowest since May 2020, indicating cooling in the US property market.
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UK output price inflation fell to a four-year low (53.2) in June, supporting the case for Bank of England rate cuts, possibly in August.
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The BoE Governor warned of a slowdown in the jobs market, citing higher national insurance and ongoing inflation risks, especially in food.
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A 10-year Industrial Strategy was launched, while consultations began on new sustainability reporting standards.
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Keir Starmer agreed to pare back a divisive £5 billion cut to welfare to quiet a rebellion by his own party.
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The EU is preparing for all outcomes in trade talks with the US, including a potential breakdown, Ursula von der Leyen said. “All options remain on the table.”
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Europe-wide markets held steady, with the STOXX 600 trading flat as investors weighed US Fed signals.
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EU finance ministers backed customs and tax reforms, including new Code of Conduct and banking crisis.
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Spain’s inflation edged up to 2.2%, driven by rising food and fuel costs.
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Talks progressed on an EU “Savings and Investments Union” and banking market infrastructure aimed at boosting integration.
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US airstrikes didn’t destroy Iran’s core nuclear components below ground, according to early Pentagon assessments, and were said to have set the program back several months to a year. The UN watchdog urged fresh inspections of the sites.
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China’s industrial firms saw their profits drop 9.1% in May, the most since October, as higher US tariffs and lingering deflationary pressure took hold.
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Chinese stock indices fell, with Shanghai Composite down ~0.9% over two sessions – but may rebound soon.
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Individual investors in Japan are increasing their purchases of government bonds at the fastest pace in 18 years, with the value of JGBs held by individuals jumping 17.1% from a year earlier at the end of March.
