Retail investors cool on AI and pile into defence sector
Retail investor appetite for AI stocks has cooled as geopolitical tensions spark a surge in enthusiasm for the defence sector.
Over 50 per cent of retail investors believe the defence sector will deliver the strongest growth over the next six months, according to new research from online investing and trading platform IG.
AI-related industries slipped into second place, with 45 per cent of investors believing it will take the top spot while 29 per cent thought semiconductor equipment would deliver the largest amount of growth according to the survey of 1,800 investors.
Chris Beauchamp, chief market analyst at IG said, “The drivers behind the defence sector are stronger than ever – and investors are clearly responding to momentum.”
“The rise of the AI industry over recent years has been extraordinary, but in 2025 cracks have started to show.”
AI uncertainty
Six months ago, retail investors predicted AI would outperform all other sectors with two in five predicting the sector would have the highest amount of growth, compared to 37 per cent opting for defence. But increased uncertainty has seen it fall out of favour.
The introduction of Trump’s tariffs in April exposed the AI sector’s “fragile resilience on international supply chains” as the majority are located across Asia, including Taiwan, which was among the countries threatened with the hardest tariffs.
“Intensifying competition from China” also increased the pressure on the AI sector as large government investment prompts swift advancements in AI hardware and software development while increasing the likelihood of UK reliance on Chinese-made AI components.
NATO commitment sees defence surge
Heightened geopolitical instability and pressure from the Trump administration has fuelled a surge in NATO members vowing to increase defence spending, with investors latching onto the momentum.
NATO called for members to pledge 3.5 per cent of their GDP for core defence as well as an additional 1.5 per cent for related security investments at the June summit. The UK is among members to have agreed to meet the combined 5 per cent commitment.
This pledge has seen a spike of capital inflows into the global defence industry, with stocks increasing sharply in value, including London listed company BAE systems which saw shares shoot up more than 50 per cent in its most recent trading statement.
Babcock also saw operating profits surge over 50 per cent to £364m in its latest results, as sentiment towards the FTSE 100 also grew to its strongest level, as 73 per cent of IG clients expect positive returns in the last six months of the year up from 69 per cent in December.
“Defence appears to offer more certainty,” Beauchamp said.
“Government spending commitments are increasing and the broader geopolitical backdrop shows no sign of easing. For many investors, defence now looks like a more resilient growth story.”