The demand for low-cost military technology has surged, with small and mid-cap defense stocks in the U.S. outperforming the S&P 500 and major defense contractors this year

According to Zhitong Finance APP, this year, the stock prices of small and medium-sized defense companies in the United States have surged significantly, outpacing their larger competitors. This is driven by global conflicts and the Pentagon's priorities, which have increased the demand for lower-cost, adaptable military systems such as AI-driven drones and unmanned vehicles.

In 2025, the NYSE Arca Defense Index rose by 34%, far exceeding the 12% increase of the S&P 500 Index. Among them, companies like Kratos Defense & Security (KTOS.US), AeroVironment (AVAV.US), Astronics (ATRO.US), and Mercury Systems (MRCY.US) performed exceptionally well.

The Pentagon has allocated nearly $6 billion for drone and counter-drone systems in its proposed $892.6 billion budget for fiscal year 2026, nearly double the amount from last year, indicating a gradual reduction in investment in traditional projects such as warships and fighter jets. Analysts say this trend favors companies that can produce modular, software-driven weapons that can be rapidly deployed.

Mergers and acquisitions, as well as venture capital, are also flooding into this field, although the transaction amounts remain relatively low. In 2025, startups in the aerospace and defense sector in the United States 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 the modern battlefield