January 25, 2023
Patrick A. Snell, CFA, CAIA
Chief Investment Officer


Defense & Space Theme


The development, deployment, and acquisition of equipment, enabling technologies and related services associated with the defense and space industries are expected to see elevated growth over the next several years.




Global defense budgets are entering a multi-year, upwards trajectory given the geo-political backdrop and inflation. In 2021, global military spending rose for the seventh consecutive year, reaching $2.1T (source: Stockholm International Peace Research Institute (SIPRI).  The combination of the war in Ukraine and concern about longer-term threats from Russia, China and other rogue nations are expected to continue to drive a meaningful increase in global military spending. Last month, President Biden signed the $858B National Defense Authorization Act into law which allocates ~$817B to the Defense Department, an 8% increase amounting to an incremental $69B.


Europe – As it relates to the Russia / Ukraine war, chances of a negotiated settlement appear remote. The proxy war seems destined to drag on. In 2022, U.S. aid to Ukraine reached ~$113B, of which $62B went to support efforts through the Defense Department.  Congress is now considering a Pentagon request for an extra $22B to replenish materials / weapons used in Ukraine.  Concerns over the possibility of a broader military conflict are growing.  Western officials are stepping up efforts to assist Ukraine in preparation for an anticipated Russian offensive this spring. Intense, broad talks and commitments are underway to provide anti-tank missiles, missile defense batteries, armored personnel carriers, and other equipment.


Longer-term and wider in scope, the U.S. and its NATO allies are signaling an increased sense of urgency surrounding the need to ramp defense spending.  Across Europe, the U.S. has committed to additional troop deployments (beyond the 100K already stationed in Europe), fighter aircraft, and air defense systems.  NATO recognizes its need to address the poor condition of weapon stocks and preparedness. Previously, in 2014, immediately following Russia’s annexation of Crimea, NATO countries agreed to spend at least 2% of their GDP on defense by 2025. Based on 2022 estimates, only 10 of 30 NATO countries met that threshold.  It’s estimated that NATO spent just 1.6% of its GDP on defense ($368B).  Germany, Europe’s biggest economy, spent just 1.3%.  Critical today, most NATO countries are under significant pressure to exceed the 2% rule over the next few years, effectively driving an $80B+ incremental spend.  Recently, French President Emmanuel Macron unveiled a proposed seven-year defense budget (2024-2023) which would increase spending from ~$392B to ~$450B.  In addition, NATO is now prepared to accept Sweden and Finland into the 30-member alliance. Within striking distance of Russia, Sweden plans to increase its defense & security budget by 64% between 2022 and 2028.


China – As Secretary of State Blinken commented in May of last year, “China is the only country with both the intent to reshape the international order and, increasingly, the economic, diplomatic, military and technological power to do it.”  Between 2012 and 2021, China’s defense budget rose 72% (source: the Stockholm International Peace Research Institute) to $293B (1.7% of GDP), second only to the U.S. (3.5% of GDP) and far surpassing Russia’s $66B (4.1% of GDP).  Indicative of China’s military might, it leads all nations in the number of serving military members at ~2M, above the U.S.  ~1.4M and Russia’s 1.15M.  Note, Russia plans to expand to 1.5M servicemen by 2026.


Not surprisingly, the U.S. is concerned about the size and rapid modernization of China’s military, its aggressive stance towards Taiwan, and its growing cooperation with Russia.  Additionally, there are intense concerns the U.S. is losing its long-held technological advantage in many key areas, including missiles and satellites.  China has been developing hypersonic missiles, electronic warfare capabilities, in addition to offensive cyber space capabilities (i.e., ability to disrupt a nation’s critical infrastructure) and directed-energy weapons. Hypersonic missiles travel at five times the speed of sound (about one mile per second) and maneuver mid-flight, making them much harder to track and shoot down than conventional ballistic missiles and capable of penetrating defenses. China is investing heavily in space, including intelligence assets and weapons (e.g., missiles, ground-based lasers). Reportedly, China has 260+ intelligence, surveillance, and reconnaissance (ISR) satellite systems, or roughly 50% of the world’s total.


China claims sovereignty over Taiwan and asserts that the Taiwan Strait is not international waters.  Over the last year, it has stepped up its pressure on Taiwan, staging large-scale military exercises offshore and firing missiles over Taiwan for the first time.  While the Department of Defense estimates that by 2027, it will be capable of successfully conducting forced reunification with Taiwan, the head of the U.S. Navy warned that timeline could be as short as 2024.


China has long rejected arms-control talks with the U.S., as its longer-term plan is to expand its stockpile of nuclear warheads in order to deter the U.S. from getting directly involved in a potential conflict over Taiwan.  As of mid-2022, Russia, U.S. and China had 5,977, 5,428 and 350+ warheads, respectively (source:  Stockholm International Peace Research Institute).  A Pentagon report predicted that China could field a stockpile of 1,000 warheads in six years and 1,500 warheads by 2035.


China surpassed the U.S. Navy in fleet size in 2020 and now has ~340 warships (versus the U.S.’s ~300), expected to grow to ~400, over the next two years (source: Pentagon’s 2022 China Military Power Report, November 2022). In 2024, China placed into service its most advanced new aircraft carrier, entirely designed and built domestically.  Meanwhile, the Pentagon’s goal is to have 350 manned ships, still well behind China.  Not only is China’s Navy eyeing the use of ports abroad, including those on the Atlantic (i.e., West Africa), it has increased the number of military drills with Russia to as many as ten a year.


Other Rogue Nations – An ongoing nuclear threat exists from other nations such as North Korea and Iran.  North Korean leader Kim Jong Un remains committed to expanding his nation’s nuclear arsenal and ballistic missile development.  In 2022, it launched more than 70 ballistic missiles. It’s leader pledged that the nation would launch its first military satellite and develop a new type of intercontinental ballistic missile, which could be used to deliver a warhead to the U.S. mainland.  Elsewhere, North Korea’s cyber program remains an attack threat to the U.S. As for Iran, the country continues to breach its obligations under the nuclear deal, exceeding limits on its stockpile level of enriched uranium.


Japan – In response to threats from China and North Korea, Japan, a partner of NATO, has signaled a major shift in its military stance. In December, the cabinet of Japan’s Prime Minister announced a dramatic rise in its defense budget due to the “most severe and complex security environment since World War Two”. For F23, Japan has approved a 26% increase to its defense spending, reaching $51B and in its five-year defense budget, a 56% increase (from $215B to $324B). Thus, the nation plans to raise its self-imposed 1% (of GDP) defense spending limit (established in 1976) to ~2%.  This aggressive move will make the country the world’s third-biggest military spender, trailing only the U.S. and China.


U.S. Strategy Emphasis = Leadership in Advanced Weapons Systems

To effectively compete across the global military theatre and successfully support its allies, U.S. leaders will continue to focus on investing in emerging / next-generation technologies. With a strategy to maintain superiority over adversaries, U.S. spending on R&D rose 24% while arms procurement fell 6.4% over the past decade.  In addition, the U.S. has established export controls in an attempt to stunt China’s technological capabilities, effectively cutting off access to high-end semiconductor chips, including those made in Taiwan and Korea.


Advance weapons systems will transform how militaries organize, equip themselves and operate; effectively elevating secure connectivity / cloud applications, artificial intelligence / machine learning, electro-optical / image sensors, and robotics.  They also integrate real-time information from satellite networks for superior Intelligence, Surveillance and Reconnaissance (ISR) systems.


Advances in weaponry are vast, with examples including:

  • Precision-guided weapons, packed with chips and sensors.
  • Networked systems directing unmanned and autonomous drones, jets, and ships.
  • Hypersonic missiles.  The first on track to be delivered to the Army by FYE23
  • Sophisticated cyber weapons, eventually powered by quantum computers.
  • Missile defense systems:
    • Satellites detecting launches with space-based infrared sensors, organizing threat data information intelligence immediately to ground commanders.
    • Next generation missile interceptors equipped to counter a missile capable of multiple kill vehicles or decoys.
    • Directed energy weapons with high-energy lasers, high-power radio frequency or microwave devices, and charged or neutral particle beam weapons.


Potential headwinds to U.S. defense spending

  • Recently, the biggest barrier for major military contractors’ growth is the adequate supply of key components (e.g., microelectronics, missile warheads). This difficulty is like supply chain dislocations experienced across the broader economy over the last couple of years.  In addition, the availability of labor to provide outsourced services and weapons assembly has been an issue.  Both dynamics are expected to gradually improve over the next year.
  • A renewed focus by on the U.S. government debt and the federal budget by House republicans could slow defense spending.
  • Beginning in 2022, Section 174 of the tax code requires companies to capitalize and amortize specified R&E (research and experimental) expenditures over multiple years.  The denial of immediate expensing for those costs could trigger an increase of federal taxable income for defense contractors. In turn, causing less cash flow available for development investment activities and/or return to shareholders (i.e., dividends, buybacks).




The space economy is expected to experience significant growth due to its growing importance to modern warfare and the rapid proliferation of commercial space ventures.  In 2021, the space economy was valued at $469B (source:  Space Foundation).  Public agencies, especially NASA and the U.S. Department of Defense and Intelligence Community, traditionally provided most of the space investment.  The Defense Department utilizes large and midsize rocket missions to carry spy and military satellites for Space Force and intelligence agencies.


In the 1990s and 2000s, declining post-Cold War military budgets led to lower orbital launch rates (2005 low point = 47).  Following the wind down of the U.S. shuttle program and China’s growing space aspirations along with Congress’s encouragement of privatization, strong growth drove the commercial space industry.  In fact, from 2013 to 2021, private investors poured $272B into the space sector.


Space is vital to U.S. national security and integral to modern warfare.  Space war means new threats to GPS, weapons guidance, navigational and missile defense systems. Established in 2019, the Space Force is the sixth branch of the U.S. military.  Space is one of the fastest growing areas of spend within the Defense Department, as its 2023 budget is $26B, up from $17B in 2022.  A large portion of the funding targets satellites.  This year, the Space Development Agency (SDA) will launch its first batch of missile tracking and data relay satellites.


Russia and China’s capabilities in space are a major concern, particularly surrounding direct attacks from other satellites, ground-launched missiles / lasers and cyber threats.  Both countries are integrating space scenarios into their military exercises. China’s space program is second only to the U.S. in number of operational satellites, including space-based anti-satellite weapons. China has long been known to be testing anti-satellite (ASAT) weapons. Chinese military will continue to integrate space services (e.g., satellite reconnaissance and positioning, navigation, and timing; and satellite communications) into its weapons and command-and-control systems. Strategic competition with China should drive U.S. government spending in multiple areas of the space economy, from launch and satellites to low-Earth orbit logistics.


Rocket Launching – 2022 was a record year with 180 successful rocket launches to orbit, 44 more than in 2021.  The leading countries included U.S.=76, China=62, Russia=21.  Half of those launches were made by commercial enterprises, with SpaceX accounting or two-thirds of that total.  The global space launch market is projected to grow from $13B in 2021 to $50B by 2030, CAGR 16% (source:  straits research).  Competition across commercial launch providers (e.g. SpaceX; UAL – JV by Boeing and Lockheed Martin) utilizing reusable components (e.g. boosters) and leveraging active launch schedules have significantly lowered launch costs for the Pentagon, not to mention commercial customers.  For example, the cost for heavy launches in low-Earth orbit (LEO) have fallen from $65,000 per kilogram to $1,500 per kilogram (in 2021 dollars).


Satellites – Used for civilian and military purposes, satellites are critical for communication, security, and  intelligence.  Many provide advanced (optical and radar) earth observation / imaging services feeding predicative analytic solutions.   Inter-satellite links—enabling rapid and secure data transfer, are crucial for military applications. Importantly, the cost and size of satellites have fallen significantly, driven by the use of smaller batteries, commercial, off-the-shelf components, as well as economies of scale in production.  Today, inexpensive, shoe-box size nanosatellites are increasingly being deployed in low-Earth orbits.  The deployment of devices using inter-satellite links (ISL) in constellations like Starlink will aim to provide full high speed and global broadband coverage.  In September of last year, the FCC reported that 4,800+ satellites were in orbit, and that it had 64,000 applications for new satellites.  By 2029, the Satellite Industry Association estimates there could be 100,000+ commercial spacecraft in orbit.


Investment Focus – Industry Participants


Over the next several years, we believe several industry segments are well positioned to capitalize on the growth in global defense and space-related spending:


  • Defense Primes and other mid-size contractors

o    Note:  Some defense contractors will simultaneously benefit from the apparent, emerging recovery in the commercial aerospace market.


  • Commercial space participants

o    Rocket (and engine) manufacturers / launch operators for orbital and sub-orbital flight

o    Satellite manufacturers / servicers and operators

o    In-space logistics / servicing firms

o    Enabling technologies providers (e.g., robotics, 3D printing, AI)


  • Government IT service and consulting providers

o    Providers of cyber and intelligence solutions


  • Software companies

o    Providers focused on IT (cloud) modernization and artificial intelligence solutions.



Mastrapasqua Asset Management, Inc. does business as M Capital Advisors.  If you have a question or need further information, please contact:

Edwin Barton, Principal, Chief Portfolio Strategist in Nashville at 615-255-9898,

Claude Koontz, CFA, Principal & Portfolio Manager in San Antonio at 210-353-0519,

© 2023 Mastrapasqua Asset Management, Inc.  All rights reserved.
The information and opinions contained in this report should not be treated as fact or as insight that will produce desired investment results over time. Investment conclusions always bear risk, and that risk may not be reasonable for any particular reader. Obviously the writer, even assuming good intentions, does not know of the reader’s particular financial circumstance and therefore is not able to assess the propriety of whether a named security makes sense as part of a given individual, family, or institutional portfolio. Mastrapasqua Asset Management clients may, from time to time, own some of the companies mentioned. We hold out no duty to give readers of this column advanced notification of when we may change an opinion. Investors should receive investment advice based on an assessment of their own particular investment circumstances and not on the basis of recommendations in this report.  Past performance is not indicative of future returns.

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