It's a little more complicated. It's calculated based on the "strength" of each unit. If you look at the army details, scroll most of the way down and it'll show you unit by unit what the strength is. This is fairly straightforward in that it's the unit's highest attack or defense value against a specific armor type. It often leads to odd results as it tends to give extra weight to highly specialized units.

I believe interceptors and strategic bombers both skew it significantly.

Generally speaking, all air skews it. All air units tend to be specialized. Tacs against unarmored, ABs against heavy armor, interceptors against other air, NBs against ships, strats against buildings.

But that same logic can be extended to other units. Cruisers tend to be rated higher than battleships because the cruiser's AA defense is better than any single matchup the battleship enjoys. Similar to other specialized ground units like AA or AT.

The "Largest Armies" or "The World's Mightiest Army" uses the sum of all Units Strength (the highest damage that individual units deal). You could actually find the total Unit Strength of every country in the world by dividing the sum of all your Units Strength with the percentage shown on newspaper (Sum of your Units Strength/Your Percentage on Newspaper). Using the total Unit Strength, we could pretty much find the Units Strength of the top mightiest countries by multiplying the total Unit Strength's value to their country's percentage (Total Unit Strength*Percentage on Newspaper).

Build a bunch of heavy armor and mechanized infantry. Fly under the radar?

It is simply calculated by the sum of all units strength (the highest damage of each unit added together). You could sum all your units strength and divide it with the percentage shown in the newspaper, that is how you could find the sum of all units strength of all countries in the game. You could play with that sum a bit more and use it to find the unit strength of the countries shown on the newspaper. Btw, I might send two replies of almost the same similarities because my previous one isn't sending.

I'm often rated quite high due to my leveled cruiser flleets. Fortunately I find ways to make them punch even harder than their military strength suggests. Most matches I probably have over 60% of my strength tied up in cruisers alone.

I think that the power of a nuke is not part of the calculation. I built dozens of nuke yet my percentage was still the same.