Aerospace, defence and medical technology – a longer-term story

Commercial aerospace, defence and medical technology (medtech) are three sectors that you wouldn’t typically lump together. However, what unites the three is a similar story of demand that’s being driven by longer-term, structural forces rather than cyclical trends: more global travel, a more complex security environment and rising healthcare needs.

All three are characterised by high barriers to entry, long product cycles and meaningful innovation. For investors, the appeal lies in several multi-year trends, including order backlogs, long contracts and installed bases, as well as support from government spending. There are opportunities for both large incumbents and specialised suppliers.

Commercial aerospace: demand, constrained supply and aftermarket cash flows

Commercial aerospace includes civil aircraft, jet engines, and the supply chain for systems, components and maintenance services. The sector is historically cyclical, but the current set‑up is supportive, notwithstanding current threats in the Middle East war theatre. Passenger traffic has rebounded strongly since the pandemic, while aircraft production is still normalising after supply‑chain disruption and labour constraints. This mismatch has produced a large backlog of orders at major manufacturers, especially for fuel-efficient narrow-body aircraft. With delivery slots pushed out for years, airlines often have to keep older jets flying longer than planned.

That matters because aerospace is not only about selling aircraft or engines, but also about servicing them. A widely cited industry rule is that roughly 70–80% of a jet engine’s lifetime cash flow is earned after delivery, in the form of maintenance, repair, overhaul and spare parts. Engine makers may accept lower margins upfront to secure placement on an aircraft type, then earn high‑margin, long-duration revenue through scheduled shop visits over decades. Because swapping an engine provider on an existing fleet is impractical, the installed base behaves like a locked-in ecosystem, leading to recurring cash flows that can resemble an annuity.

Innovation further strengthens incumbents. Fuel efficiency and reliability drive airline purchasing decisions, and certification requirements make development long and capital-intensive, thereby keeping barriers to entry high. Key risks include sharp travel demand shocks (recessions, fuel price spikes, or geopolitical events such as the war in the Gulf), supply chain bottlenecks that delay deliveries and cash conversion, and longer-term environmental pressures. Even with these risks, today’s backlog and service-heavy economics can dampen the traditional boom-bust profile and improve earnings visibility.

Defence: a structurally higher spending cycle with technology expansion

Defence companies supply governments with military equipment and services, from platforms and munitions to electronics, cyber and software. The sector is typically less sensitive to the economic cycle because revenue depends on public budgets and procurement programmes. What stands out today is the breadth of the spending shift. Geopolitical tensions and active conflicts have triggered rearmament and modernisation, particularly across Europe, and have refocused policy attention on meeting (and in some cases exceeding) NATO’s 2% of GDP spending guideline. Global military expenditure has also reached record levels.

The opportunity is not limited to replenishing stockpiles. Many countries face multi‑year programmes to rebuild inventories, replace ageing systems and invest in capabilities shaped by recent conflict: drones and counter-drone technology, integrated air and missile defence, electronic warfare, secure communications, space‑enabled surveillance and AI‑supported decision-making. This broadening of the addressable market can lift growth above the sector’s historical mid‑single‑digit profile and reward contractors that can integrate hardware and software into “systems of systems.”

Large programmes are funded in stages and often include progress payments; once selected, contractors can become long-term providers for sustainment, upgrades and spares. That benefits the diversified defence primes with broad portfolios and international customer bases (such as Lockheed Martin, General Dynamics, Raytheon and Northrup Grummon), while also creating opportunities for specialists in high-growth niches (autonomy, sensors, cyber and space components).

Risks are mainly political, reputational and competitive. Budgets can shift with elections; large contract competitions are often winner‑takes‑all; and ESG constraints can affect investor demand. Technology is also a strategic risk: firms that lag in fields such as autonomy, cyber resilience, or sensor integration may lose relevance over time. Still, multi‑year backlogs and national security’s elevated priority make defence an uncommon blend of resilience and growth.

Source: Ranked: Top 15 countries by military budgets in 2025 , Visual Capitalist, June 2025

Ranked: Top 15 Countries by Military Budgets in 2025

Medtech: defensive demand, steady growth and innovation-driven optionality

Medtech covers devices and equipment used to diagnose, treat and monitor patients. This includes implants, catheters, imaging systems, surgical tools, and wearable monitoring devices. Demand is relatively inelastic: healthcare needs persist through economic cycles. Yet Medtech is innovation-intensive, and new products can expand procedure volumes, improve outcomes and win market share.

The market is large and growing. Global medical device sales were about $550 billion in 2024 and are projected to exceed $1 trillion by 2034, implying mid-single-digit annual growth. Demographics are the anchor driver: the combination of ageing populations and rising chronic disease prevalence increases demand for cardiovascular interventions, diabetes management and orthopaedic procedures. Emerging markets add some runway for providers as healthcare access expands and hospitals upgrade equipment and diagnostic capacity.

Innovation is the key differentiator. Robotic-assisted surgery is expanding into new procedures, minimally invasive techniques can shorten recovery times, and AI is being embedded in imaging, diagnostics, and clinical workflows to improve detection and productivity. Large Medtech firms also look to acquire smaller innovators and enter faster‑growing niches, which can lift growth above baseline when integration is well executed.

Risks include hospital budget pressure that can delay capital spending, pricing pressure in highly competitive categories and occasional recalls or litigation. Regulation can tighten (including higher compliance requirements in some jurisdictions), raising costs and extending timelines. Large incumbents typically manage these hurdles best, thereby reinforcing their competitive advantages over time.

Comparative snapshot

Aerospace is the most economically sensitive of the three (while the current Gulf war is a major challenge to global travel, the full impact of which we have still to see) but is unusually supported by extended order backlogs and high-margin aftermarket services tied to installed fleets. Defence is primarily geopolitically driven, with visibility from long programmes and growth boosted by technology-heavy domains. Medtech is the most “defensive growth” sector, anchored by demographics and chronic disease, with upside from innovation and consolidation.

Note to readers:

This article was written with the assistance of artificial intelligence, based on research by the author. The article was checked and edited by the author and our editorial team.