2025 closed as a watershed year for defense technology markets. Across public contractors, venture-backed startups, and sovereign budgets the market set multiple records — not as a single flash of enthusiasm but as a sustained reallocation of capital and industrial effort toward munitions, sensors, autonomous systems, and sovereign AI. The result is higher revenue visibility for primes, a frothy private market for defense startups, and acute pressure on supply chains and manufacturing capacity.
Global military spending is the structural backdrop to every market move this year. SIPRI reported an unprecedented surge in global military expenditure in 2024 that carried momentum into 2025, lifting demand for hardware and platform sustainment worldwide. That sudden, broad-based increase is the clearest macro driver behind bigger backlogs, larger contracts, and expanded R&D budgets across NATO and many partners.
At the prime contractor level 2025 delivered record backlog and order-book signals. Northrop Grumman entered the year with a record backlog near $93 billion, a figure that underwrites multi-year revenue visibility even as program-level cost issues compress near-term margins. Lockheed Martin similarly reported a backlog north of $170 billion in early 2025, a clearest indicator that demand is not transitory but institutionalized through long-term procurement decisions. Those backlogs shift the risk profile for investors and suppliers alike: revenue becomes more predictable while execution risk and working capital needs climb.
Capital markets and private investment followed demand into defense tech in a way that broke conventional patterns. 2025 minted a record number of military-oriented unicorns and saw extraordinary late-stage capital flows into a handful of platform companies. PitchBook and industry reporting put aggregate private investment into defense startups at levels not seen in prior cycles, and Forbes noted a meaningful year-end concentration of new unicorns. The standout transaction was Anduril’s midyear megaround which raised multiple billions and pushed the firm into the tens of billions in private valuation. Those deals demonstrate investor willingness to underwrite rapid scale in hardware plus software plays, and they distort comparables in both M&A and public-market expectations.
That private capital stampede has consequences. First, valuations are signaling future-margin and production assumptions that are aggressive compared with historical defense manufacturing realities. Second, the surge is reshaping supplier networks as startups vertically integrate manufacturing capacity to meet both government contracts and commercial investor expectations. Anduril’s large factory investments and other scale-up commitments exemplify that verticalization trend.
On the demand side the U.S. Pentagon and allied procurement agencies moved from rhetoric to industrial acceleration. By autumn the Pentagon had publicly urged missile and munitions producers to materially raise output across several critical lines, including interceptors and anti-ship and air-to-ground strike munitions. That request reflects inventory shortfalls created by sustained operational support to partner nations and a strategic pivot to prepare for higher-intensity contingencies. The practical effect on markets has been an immediate prioritization of capital expenditure within defense primes and their suppliers and a re-rating of suppliers that can expand solid-propellant and seeker capacity quickly.
Two short quantitative takeaways anchor the year: higher visibility and higher upfront cost. Backlogs at major primes moved to multi-decade levels in absolute dollars, while private funding flows to defense tech exceeded prior year norms by a wide margin. Those paired dynamics imply more predictable revenue for firms with production capacity and simultaneous strain on working capital as suppliers ramp. The market is pricing capacity and execution at a premium accordingly.
Risks and distortions are already visible. Rapid scaling pressures amplify supply chain fragility for key subsystems such as solid rocket motors, high-reliability guidance electronics, and advanced sensors. They also create political risk because governments are now directly linking procurement outcomes to industrial policy and domestic employment. That linkage increases program stickiness but also raises the odds of cost-plus interventions and regulatory constraints on export and foreign investment.
What should investors, procurement officers, and industrial planners watch in 2026? Track three operational metrics closely. First, book-to-bill conversion rates for the big primes as a leading indicator of whether backlog dollars are converting into revenue at modeled rates. Second, race-time production metrics for prioritized munitions lines and critical subsystems, because production throughput is the current choke point in capability fielding. Third, private-to-public transition activity in defense startups: IPOs, special-purpose acquisition company deals, or strategic M&A will determine whether private valuations rebase or compound.
2025 ended with the defense market resetting its baseline assumptions. The combination of record sovereign spending, outsized private financing for platform-level startups, and an explicit industrial push to expand production capacity has created a new equilibrium. That equilibrium rewards companies that can combine rapid software iteration with durable manufacturing scale and punish those that rely on expectations of easy cost reduction or rapid multiple expansion without demonstrable delivery. The records broken in 2025 are not just headline facts. They are structural signals that the defense industrial complex is entering a capital intensive phase where execution and supply chain architecture will determine winners and losers.