A quiet revolution is developing in the corridors of NATO headquarters in Brussels that will reshape the global defense industry for decades. The alliance’s commitment to spend 5 per cent of GDP on defense by 2035 appears, on its surface, to be another incremental increase in military budgets. Yet buried within the 1.5 percentage points of that target, representing hundreds of billions in annual spending, is committed for “broader defense” capabilities, with space and cyber warfare at its core. The market’s response has been swift as global investment in space startups surged to $3.1 billion in the second quarter, marking a 55 per cent increase from the previous quarter’s $2 billion. This represents the second-highest quarterly total on record, driven not by commercial satellite demand or space tourism, but by a fundamental recognition that warfare itself is migrating beyond Earth’s atmosphere. The interconnection that others are missing lies in the timing and scale of this convergence.

France’s Emmanuel Macron, announcing a €6.5 billion defense spending acceleration, declared that “to be free in this world, we must be feared”. His rhetoric signals more than traditional military posturing, and it reflects a strategic pivot toward space-based deterrence that will define 21st-century geopolitics. Similarly, the US Space Force conducted its largest-ever training exercise this month, explicitly practicing “orbital warfare” scenarios.

The urgency is driven by adversaries who have already militarized space. For example, Russia has launched three potential anti-satellite weapons this year alone. At the same time, China claims the capability to deploy missiles from space platforms. As one recent analysis concluded, war in space “is not a future problem: it’s happening now”.

Traditional defense contractors remain dangerously unprepared for this transition. Companies built around terrestrial weapons systems, such as tanks, fighter jets, and naval vessels, all face an existential choice: evolve rapidly into space-capable entities or cede the future to space-native startups that understand satellite warfare. The $175 billion Golden Dome missile defense initiative announced by the US has become a catalyst for this investment surge, stimulating new partnerships between traditional aerospace giants and small space startups. European space ventures with defense-focused business lines captured 40 per cent of total funding in 2024, a proportion that has accelerated into 2025. Similarly, NATO’s new spending framework allocates 3.5 per cent of GDP to “core defense requirements,” traditional military hardware, while the remaining 1.5 per cent targets “broader defense,” including space and critical infrastructure protection. For a collective GDP approaching $50 trillion, that 1.5 per cent represents $750 billion annually by 2035, a sum larger than the current global space economy.

Current NATO defense spending totals approximately $1.5 trillion annually. Thus, the move to 5 per cent of GDP will generate an additional $1.2 trillion in annual military expenditure by 2035, with $750 billion of that increase flowing toward space and cyber capabilities. This represents the most significant peacetime military spending increase in modern history, dwarfing the Reagan-era buildup that helped end the Cold War. Yet, markets have barely begun to price in this reality. Traditional defense stocks trade on assumptions of gradual growth in conventional weapons systems. Space companies are valued primarily on commercial satellite prospects and speculative Mars missions. Thus, neither framework captures the coming convergence where military space capabilities become the primary determinant of national power. Space-based assets offer unprecedented advantages in modern warfare, and a nation that controls orbital space controls the flow of information that underpins modern civilization.

China and Russia have recognized this reality for years, investing heavily in anti-satellite weapons, cyber warfare capabilities, and space-based platforms. Meanwhile, the US and its allies are now scrambling to catch up, revealing a critical vulnerability of their dependence on legacy defense contractors ill-equipped for space warfare’s unique demands.

This transformation to a new type of warfare will unfold in three distinct phases, each creating different investment opportunities and competitive dynamics. Traditional defense contractors would acquire space capabilities through partnerships and acquisitions in the first phase, which is already underway. Companies like Northrop Grumman, with its Proliferated Warfighter Space Architecture constellation, represent early attempts to bridge terrestrial and orbital warfare. In the second phase, beginning in 2026-2027, there will be an emergence of pure-play space defense contractors as primary military suppliers. Unencumbered by legacy terrestrial systems, these companies will capture disproportionate value as military spending shifts toward orbital assets. For example, the NATO Innovation Fund, deploying over €1 billion in deep tech investments, is already positioning for this transition. Finally, in the third phase of this transformation by 2030,  space will be established as the primary theater for military competition in modern weaponry. Nations will compete not for territorial control but for space supremacy, with space-based weapons platforms determining the balance of power.

Companies developing satellite constellations, space-based sensors, and orbital maneuvering capabilities will become the new military-industrial complex. At the same time, traditional defense contractors will face the choice of acquiring space capabilities or becoming obsolete.

France’s accelerated defense spending timeline offers a preview of this urgency. Macron’s decision to reach €64 billion in annual defense spending by 2027, three years ahead of schedule, reflects recognition that space militarization cannot wait for traditional procurement cycles, and his “to be feared” rhetoric signals a shift from defensive to offensive space capabilities, including potential space-based weapons platforms.  It is clear that control of space will determine which nations can project power globally, protect their critical infrastructure, and maintain economic competitiveness in an increasingly digital world.

The space militarization gold rush has begun. Companies that understand this transition will capture extraordinary value. The only question is whether traditional defense contractors will grow quickly enough to participate or whether they will become losers in the very revolution they failed to anticipate.