Amped up conflict everywhere from Iran to Lebanon to Qatar to the United Arab Emirates has renewed investors’ appetite for defense stocks. Signs suggest that military stocks could continue to extend their rally despite how hot they’ve become.
The iShares Aerospace and Defense exchange-traded fund is down 0.6% since the U.S. struck Iran on Feb. 28, declining less than the broader S&P 500’s 2% loss. The ETF has been quietly outperforming since the U.S. captured Venezuelan leader Nicolás Maduro at the start of the year. The ETF is up 13% year-to-date, while the S&P 500 is down 1.5%.
Shares of defense companies also look much more expensive than the broader market. The ETF is trading at 37.86 times projected earnings for the next 12 months, above its 10-year average of 23.04. The S&P 500, meanwhile, is trading at a 21.66 multiple, above the 10-year average of 19.24.
In 2025, investors poured more money into the U.S. Aerospace and Defense ETF than in any single calendar year since 2020. Its AUM has also hit records, sitting at over $16 billion.
Behind the gains are bets that a rapidly changing world order means that geopolitical tensions will continue to run high in the years to come.
The invasion of Ukraine in 2022 forced European governments to abandon their decadeslong low defense spending habits toward higher targets, which led to an increase in defense spending. Then came the Israel-Gaza conflict starting in 2023, and most recently, the U.S. saying it wants to take over Greenland. Basically, there’s been no shortage in conflict, which has greatly benefited defense stocks.
If the ETF can hold its magnitude of share outperformance at these levels by the year’s end, then it would be its best five year calendar performance relative to the S&P 500 on record.
In typical circumstances, that would mean that the enthusiasm has gotten ahead of itself and is now vulnerable to a pullback. But that doesn’t seem to be the case for defense stocks this time around.
During the Cold War and Vietnam War era, the U.S.’s spending on defense as a share of GDP was much higher than it is currently, yet it didn’t help military stocks much. There’s a multitude of reasons for that.
For starters, defense companies operate on a multiyear cycle, where research and development is expensive. While the outbreak of a war can help defense stocks gain in the near term, it’s rare to see any advance be sustained because they require an extensive shift in the company’s business cycle.
Another issue is that governments are typically the biggest customers of defensive equipment, so they have a greater influence on their bottom lines. So, for example, after a war is over, politicians can be eager to renegotiate contracts if they want to ditch them in favor of the peace dividend.
“After America fully entered the second world war in 1942 its government repeatedly ‘renegotiated’ prices previously agreed in contracts with weapons firms—always downwards and by a lot. It did the same again during the Korean war, and continued until the late 1970s as it fought the cold war against the Soviet Union,” according to an article in The Economist.
There’s also concerns that the inventory can become obsolete very quickly due to changes in technology. That is an especially acute problem for drones makers.
“You don’t need the old models, right? They are not accurate or useful,” Finland’s defence minister Antti Häkkänen said recently on the sidelines of the Munich Security Conference, according to the Financial Times, adding: “and they might be out of date a month after you store them.”
What might be different for defense stocks this time around is that they could benefit from the support the government is providing. It’s no longer just a customer, but also an investor, likely rooting for the success of these companies.
The President this week also said in a Truth Social post that he met with some of the largest defense manufacturing companies and discussed quadrupling production of the “exquisite class” weaponry. According to Wall Street Journal reporting the administration had spent months discussing these plans with munitions makers.
As a geopolitical shift takes place on the global scale, American defense companies would be some of the biggest beneficiaries.
Seven of the top 10 world’s largest publicly traded companies in the aerospace and defense industry are based in the U.S. And they are all also a part of the iShares Aerospace and Defense ETF. With that being said, here’s what you need to know about some of the holdings in the ETF.
- RTX Corporation (RTX 0.77% ): The company’s business is in high-end munitions, sensors, and the Patriot air defense ground systems. In a new deal with the Pentagon, RTX’s Raytheon will increase the annual production of the Tomahawk cruise missile, AMRAAM air-to-air missiles, Standard Missile-6, Standard Missile-3 IIA and Standard Missile-3 IB. After being finalized, the contracts will go up to seven years.
- Lockheed Martin (LMT 0.83% ): The company’s business is in F-35 fighter jets, THAAD missile defense, which is the only U.S. system designed to intercept targets outside and inside the atmosphere, and HIMARS, which is a flexible, affordable, and highly effective mobile artillery system. According to its earnings report, Lockheed delivered a record 191 F-35s in the past year, up from 110 jets in 2024. Like RTX, it has also reached a seven-year agreement with the DoD to boost production of Patriot PAC-3 missile interceptors to 2,000 units annually, from 600. It plans to share its profits with the U.S. government if it exceeds production and profit goals.
- L3Harris Technologies (LHX 0.59% ): The company’s business is in electronic warfare (EW), tactical comms, and rocket propulsion. Its growing rocket motor business has received $1 billion from the U.S. government. They are planning an IPO of that business later this year, backed by a $1 billion government convertible security investment. “We are fundamentally shifting our approach to securing our munitions supply chain,” said Michael Duffey, Under Secretary of Defense for Acquisition and Sustainment, according to CNBC. “By investing directly in suppliers we are building the resilient industrial base needed for the Arsenal of Freedom.”
- Northrop Grumman (NOC 0.79% ): The company’s business is in stealth bombers, nuclear deterrents, and space surveillance. It has reached an agreement with the Department of Air Force to accelerate B-21 Raider production. “The B-21 is foundational to our long-range strike capability and to credible deterrence,” said Secretary of the Air Force Troy Meink, according to a press release by the Department of Air Force.
- General Dynamics (GD -0.41% ): The company’s business is in nuclear submarines, armored vehicles, and munitions. Additionally, politicians are pushing the Navy to award contracts that could be valued at around $100 billion for General Dynamic’s Electric Boat. “I fully expect the Navy to quickly move forward with this block buy contract, one that will save the taxpayers money and preserve the health of the submarine industrial base,” said Rep. Rob Wittman, a Virginia Republican who is vice chairman of the House Armed Services Committee, according to a Wall Street Journal story.
- GE Aerospace (GE -3.94% ): It’s a dominant provider of military jet engines. It recently reported higher fourth-quarter revenue, thanks to higher air travel and defense demand, but still there are worries that the exponential growth seen in recent years could stall.
As always, Signal From Noise should not be used as a source of investment recommendations but rather ideas for further investigation. We encourage you to explore our full Signal From Noise library, which includes deep dives on the recent gold rush, quantum computing, and the race to onshore chip fabrication. You can also find our take on space-exploration investments, a recent update on AI focusing on sovereign AI and AI agents, and the rising wealth of women.
