Not so long ago, AI stocks were the golden child of every retail investor’s portfolio. Well, times change faster than a crypto crash. Over 50% of retail investors now believe defence sector stocks will deliver the strongest growth over the next six months, according to fresh research from IG’s survey of 1,800 investors.
AI-related industries? They’ve slipped to second place with 45% backing, whilst semiconductor equipment trails at 29%. It’s a dramatic shift from just six months ago that’s reshaping investment strategies—and for good reason.
Why Retail Investors Cooled on AI Stocks
Six months ago, AI was the clear favourite with 40% of retail investors betting on artificial intelligence versus just 37% for defence. What changed? Reality hit hard.
Trump’s April tariffs exposed AI’s Achilles’ heel: fragile supply chains stretched across Asia. When Taiwan—a critical chip manufacturing hub—faced some of the harshest tariff threats, retail investors started sweating. Suddenly, that “unstoppable” AI growth story looked a bit more stoppable.
Chris Beauchamp, IG’s chief market analyst stated: “The rise of the AI industry over recent years has been extraordinary, but in 2025 cracks have started to show.”
China Adds Pressure
Here’s another wrinkle: China’s ramping up AI competition with massive government backing for AI hardware and software development. That’s creating two problems for Western retail investors—tougher competition and potential reliance on Chinese-made AI components. Not exactly the kind of geopolitical dependency you’d want in your growth portfolio.
Defence Sector Investment Surge
Whilst AI stumbled, the defence sector found its wings. NATO’s June summit was basically Christmas morning for defence stock investors. The alliance called for members to pledge 3.5% of GDP for core defence spending, plus another 1.5% for security investments—a combined 5% commitment that the UK has already signed onto.
BAE Systems shares rocketed over 50% in recent trading, whilst Babcock saw operating profits surge 50% to £364m. Even broader market sentiment got a boost—73% of IG clients expect positive FTSE 100 returns in the year’s back half, up from 69% in December.
Government Defence Spending Creates Market Stability
Unlike the volatile world of tech valuations, defence sector investments offer something retail investors crave: predictability. Government defence spending commitments are locked in, and with geopolitical tensions showing zero signs of cooling down, the sector looks built for sustained growth.
“Defence appears to offer more certainty,” Beauchamp notes. “Government spending commitments are increasing and the broader geopolitical backdrop shows no sign of easing.”
What This Investment Shift Means for Your Portfolio
This retail investor shift reflects a broader move towards sectors with government backing and clearer revenue visibility. Whilst AI stocks aren’t dead—they’re still the second-favourite sector—the days of blind faith in tech growth might be over.
Smart money is following the government money, and right now, that’s flowing into defence investments. Whether this trend holds depends on how geopolitical tensions evolve and whether AI companies can solve their supply chain vulnerabilities.
Ready to explore defence sector opportunities? Consider the fundamentals before jumping in—government contracts provide steady revenue, but they’re also competitive and heavily regulated.
FAQ
Q1: Why did retail investors lose interest in AI stocks?
A: Trump’s tariffs exposed AI’s reliance on Asian supply chains, particularly Taiwan. China’s increasing competition in AI development also made the sector appear riskier for Western retail investors.
Q2: What’s driving the defence sector investment surge?
A: NATO’s call for 5% GDP spending on defence and security, combined with heightened geopolitical tensions. Government spending commitments provide more predictable revenue streams than volatile tech stock valuations.
Q3: Which defence stocks have performed best for retail investors recently?
A: BAE Systems saw shares jump over 50% in recent trading, while Babcock reported 50% operating profit growth to £364m. Both benefited from increased defence sector investment sentiment.
Q4: Are AI stocks completely out of favour with retail investors?
A: Not entirely—45% still back AI for growth potential, making it the second-favourite investment sector. However, it’s lost its clear leadership position to defence sector stocks.
Q5: Should retail investors switch from AI to defence stocks?
A: Consider your risk tolerance and investment timeline. Defence offers government-backed stability but faces regulatory challenges. AI stocks still have long-term growth potential despite short-term supply chain headwinds.
DISCLAIMER
Effective Date: 15th July 2025
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