Israel's dual prioritization of its domestic defense industry and pursuit of joint defense projects with the United States will reduce Israel's vulnerability to foreign influence and supply chain disruptions, expand business opportunities for U.S. defense companies, and invite more private investment in key Israeli defense contractors. Israel and the United States are expected to begin negotiating a new 10-year security agreement in the coming weeks. In a Jan. 26 Financial Times article, the former chief financial adviser to Israel's military and defense ministry, Gil Pinchas, said the deal would likely emphasize joint military and defense projects and deprioritize cash grants that have enabled Israeli purchases of U.S. weapons systems and components. This emphasis marks a stark change from the previous 10-year U.S.-Israel security agreement signed in 2016, which earmarked $33 billion of the deal's $38 billion for cash grants. The shift heralds a new era in the U.S.-Israel security relationship that prioritizes production over purchases as Israel increasingly pursues an independent defense industry. To this point, on Jan. 9, Israeli Prime Minister Benjamin Netanyahu said he hoped to "taper off" Israeli reliance on U.S. military aid over the next 10 years. 

• The new security agreement will extend the more than six decades of U.S. military support to Israel, which began in the early 1960s but significantly expanded following the Yom Kippur War in 1973.
• The United States is the largest foreign provider of weapons and their components to Israel. Among other things, it has provided advanced weapons, including advanced aircraft, missile systems and precision bombs, to ensure that Israel maintains its qualitative military edge over regional rivals. 
• The 2026 U.S. National Defense Strategy stated that "Israel has long demonstrated that it is both willing and able to defend itself with critical but limited support from the United States. Israel is a model ally, and we have an opportunity now to further empower it to defend itself and promote our shared interests."

Israel's indigenous defense sector has grown significantly over the last several years amid multiple regional conflicts, and the government is pushing to accelerate this growth, not least to reduce other countries' leverage over Israel's foreign policy. Following Hamas' Oct. 7, 2023, attacks against Israel and the subsequent start of the war in Gaza, Israel has boosted its defense spending and maintained an aggressive regional strategy of military strikes amid tensions with Hamas, Lebanon's Hezbollah, Iran and Yemen's Houthis. These multi-year conflicts have encouraged Israeli defense innovation and domestic weapons manufacturing, particularly amid growing defense exports to foreign — especially European — markets. To encourage this trend, in December 2025, Netanyahu unveiled a 10-year $110 billion plan to develop an independent arms industry. Efforts to expand Israel's domestic production come amid a push to reduce reliance on foreign suppliers for munitions, aircraft and key components due to concerns about potential supply chain vulnerabilities and other countries' leverage over Israel's foreign policy. The latter fear is not unfounded, as the United States has at times delayed military aid to Israel during periods of elevated tensions over Israeli military action. Most recently, in 2024, former U.S. President Joe Biden's administration delayed the delivery of one shipment of 2,000-pound bombs to Israel to pressure the Netanyahu government to alter its military operations in the Gaza Strip; subsequently, Israel has indicated its intent to build that type of bomb domestically. Additionally, during the Gaza conflict, several countries — including Spain, the Netherlands and Canada — have restricted or banned the export of weapons or components to Israel due to concerns that the exports could be used to violate human rights in Gaza.

• In 2024, Israel's defense spending reached its highest level in recent decades at $46.5 billion, or just under 9% of gross domestic product. In comparison, Israel's 2026 defense budget is $34.6 billion, or around 6% of GDP. While current spending has decreased from its 2024 peak, Israel's defense budget still remains higher than the roughly 4.5% of GDP defense expenditures prior to the start of the Israel-Hamas war. 

Although Israel's defense sector is highly unlikely to become fully independent from the United States, Israel will likely seek to mitigate risks by prioritizing the domestic development of weapons most vulnerable to disruptions. Since many of Israel's existing systems were developed with U.S. technology and cooperation, incorporate U.S.-made parts or are wholly U.S.-provided, Israel's defense sector is highly unlikely to become fully independent from the United States over the next few decades, a reality that even Netanyahu has acknowledged. With this in mind, Israel will likely prioritize its domestic manufacturing of weapons and advanced technologies that are more vulnerable to politically induced delays abroad and supply chain disruptions. These include weapons that have higher risks (such as those used in long-distance attacks), niche uses (such as bunker busters against underground targets) and/or greater end-use concerns (including bombs and other weapons that could be used against civilian populations). Focusing on these weapons will improve Israel's weapons supply chain security and reduce the risk that a foreign country like the United States will be able to pressure Israel to take a more restrained approach in a future conflict. To this end, Israel will likely include conditions in some new defense contracts that stipulate a domestic production requirement. Over time, expanded domestic production will give Israel greater operational flexibility that will likely facilitate more high-risk military actions throughout the Middle East, regardless of the politics of the U.S. administration in power at the time. By contrast, Israel is less likely to focus on developing defensive weapons as extensively over the next several years, in part because these weapons are typically less politically sensitive. However, concerns over resupply capabilities, especially of interceptors for missile defense systems, may cause Israel to expand this production specifically. 

• In late January, the Israeli Ministry of Defense purchased $183 million worth of "general purpose" bombs from Elbit Systems, a major Israeli defense company. As part of the deal, the ministry mandated that Elbit develop domestic manufacturing capabilities to produce the bomb. 
• In September 2025, Israel used U.S.-made F-15 and F-35 fighter jets to attack Hamas leaders in Doha, Qatar, which is a major non-NATO ally of the United States. As a result, the attack elevated tensions between the Trump administration and the Netanyahu government. Eventually, Israel will likely aspire to develop a long-range system independently that could conduct high-risk strikes against distant targets in order to mitigate the political and diplomatic repercussions of using U.S. systems, especially against a U.S.-aligned country like Qatar. 
• However, Israel has integrated several advanced U.S. systems — including advanced aircraft like the F-35s — into its arsenal that are difficult to replace with indigenous models. As such, Israel will likely continue to rely on some U.S. systems for which there are no easy substitutes or domestic alternatives. 

Israel's growing defense sector and evolving security cooperation with the United States will likely expand business opportunities for U.S. defense companies, especially in emerging technologies. Israeli advanced technologies, including drones, multi-layered missile defense systems and laser technologies, such as the recently unveiled Iron Beam air defense system, will be in high demand from several countries, including European countries and the United States. Moreover, both Israeli and U.S. officials have expressed interest in expanding existing cooperation in a number of areas, particularly regarding missile defense. Not only have Israeli officials indicated that these joint projects are likely to become greater priorities during the next security agreement, but the United States' National Defense Authorization Act established the U.S.-Israel Defense Industrial Base Working Group to identify areas of further cooperation, including in defense production, in addition to allocating $35 million to support research and development in emerging technologies, including in artificial intelligence, robotics and cybersecurity. The joint cooperation ventures will likely expand business opportunities for U.S. defense companies, especially those focused on advanced weapons systems and emerging technologies. 

• The United States will likely be a prospective buyer of some of these advanced Israeli technologies, including anti-drone and laser systems, as part of U.S. efforts to integrate emerging technologies into its arsenal amid elevated global tensions, including with Russia and China. Some of the Israeli technologies the United States has expressed interest in acquiring have already been combat-tested, increasing the United States' confidence in those systems. 

As part of Israel's efforts to expand its defense industry without overly burdening the national budget, the government is moving to partially privatize select defense contractors to attract private investment, though the Israeli government will almost certainly maintain majority stakes. Mid-January media reports stated that Israeli officials plan to list 25%-30% of shares from Israel Aerospace Industries and Rafael — two of the country's largest state-owned defense contractors — in tranches on the Tel Aviv Stock Exchange as early as the second quarter of 2026. This partial privatization is likely an effort to expand the companies via private sector investment, not just elevated defense spending, as the government works to maintain a relatively low budget deficit to mitigate potential inflationary pressures. Over time, this will likely result in private capital replacing some government spending, and Israel will likely list additional shares on the stock market to expand the private sector's role in growing the defense industry. Even so, the Israeli government is almost certain to maintain a majority stake in partially privatized companies to protect Israeli national security interests. 

• Israel's budget deficit ceiling for 2026 is 3.9% of GDP, which is below the 5.5% five-year average between 2018-22 prior to the start of the Gaza war (though this average was elevated in part due to the COVID-19 pandemic). 
• Though Israel's inflation rates are generally low and are currently within the Bank of Israel’s target range of 1%-3%, the government's hesitance to increase its spending deficit is largely driven by longstanding policies stemming from concerns about high inflation in the 1980s. This high inflation was caused in large part by excessive deficit spending due to increased defense spending following the 1973 Yom Kippur War, a period when U.S. military aid to Israel was just beginning to significantly increase.
• Elbit Systems, one of the three major Israeli defense companies, along with Israel Aerospace Industries and Rafael, is already publicly traded on the Tel Aviv Stock Exchange.