The sound of cannon fire often signals immense financial gain. While markets debate whether Middle Eastern conflicts will hinder the global economy, the S&P 500 and Nasdaq indices have both surged to new record highs. What does war truly signify for U.S. equities? A report from Caitong Securities offers a straightforward answer: war and the long-term bull market in U.S. stocks are not adversaries but exist in a state of near symbiosis. Historical performance of the Dow Jones Industrial Average substantiates this view—it rose 28% during the Spanish-American War, 26% during the Korean War, and despite the Vietnam War lasting 19 years, the index still gained over 80%. The Afghanistan War, spanning the 2008 financial crisis, saw the index nearly double.
Since becoming the world's largest economy in the late 19th century, the United States has reaped substantial benefits from most wars it has engaged in, with the notable exception of Vietnam. From seizing Spanish colonies in the Spanish-American War, to profiting immensely from the two World Wars, and onto the Gulf War and subsequent smaller conflicts centered on oil resources, America transitioned from being a "war participant" to a "war instigator."
The reaction pattern of U.S. stocks to warfare is also clearly discernible. Up to and including World War II, wars primarily influenced markets through sentiment shocks. Starting with the Korean War, this direct effect gradually diminished, and wars began to impact equities more through economic channels such as inflation, oil prices, and fiscal deficits.
The Vietnam War was the sole conflict where the U.S. suffered a net loss, profoundly altering its war calculus. Subsequent conflicts initiated by America almost invariably shared three characteristics: short duration, limited geographical scope, and a focus on oil—with objectives consistently achieved.
America's war strategy has undergone three major shifts, from opportunistic exploitation to proactive instigation. The 1898 Spanish-American War marked the first significant conflict actively provoked by the U.S. Domestically, monopolistic conglomerates urgently needed new markets, investment outlets, and sources of raw materials, making Spain's crumbling colonial empire a prime target. Post-war, the U.S. gained control over Cuba and acquired the Philippine Islands, Guam, and Puerto Rico. The Dow Jones Industrial Average rose 28% during the three-month war, closely tracking victories on the battlefield.
When World War I erupted, the U.S. initially remained neutral. During the market closure in July 1914, investors realized America would be the primary beneficiary of the European conflict—its homeland, distant from the fighting, could continuously produce and export munitions to Europe. By 1917, American banks, including J.P. Morgan, had extended $10 billion in loans to the British and French governments for weapon purchases. Although the index fell nearly 10% after the U.S. officially entered the war in April 1917, the Industrial Average had already surged approximately 107% from its low in 1914 to March 1917.
World War II was the pivotal conflict that cemented America's global hegemony. Initially, in September 1939, U.S. stocks declined due to suppressed corporate profit expectations from an "excess profits tax"—Congress imposed a steep tax rate of up to 95% on corporate profits exceeding $5,000, severely impacting the numerator in Dividend Discount Models. It wasn't until the tide turned with the Battle of the Coral Sea and the Battle of Midway in May 1942 that investors, sensing the shift, fueled a market rebound. The Industrial Average rose 82% in the latter half of the war, the Transportation Index surged 127%, and the Utilities Index jumped 203%.
The Korean War was the first conflict the U.S. did not clearly "win." Although munitions demand stimulated the post-WWII sluggish economy, U.S. forces failed to achieve their primary objectives. Nonetheless, the Dow Jones Industrial Average still gained 26% throughout the period, with the Transportation Index soaring 86%.
The Vietnam War served as a watershed, being the only war the U.S. both lost and derived no benefit from. U.S. defense spending ballooned from $49.6 billion in 1961 to $81.9 billion in 1968 (43.3% of the federal budget), the fiscal deficit surged from $3.7 billion to $25 billion, and inflation rose from 1.5% to 4.7%. America's share of global GDP fell from 34% to under 30%. Post-Vietnam, U.S. war strategy fundamentally shifted: abandoning large-scale ground wars in favor of short-duration, low-casualty, air-strike-centric "proxy" conflicts.
Subsequent wars—the Gulf War, Kosovo War, Afghanistan War, and Iraq War—were invariably initiated by the U.S., leveraging regional conflicts or black swan events. These engagements were primarily concentrated in the Middle East and Balkans, with core objectives revolving around control of oil resources and munitions demand.
The mechanism through which war affects the stock market has transformed: from sentiment-driven to economically-driven. Prior to and during WWII, war events often directly impacted investor sentiment. Victories like the Battle of Manila Bay and the Battle of Santiago de Cuba during the Spanish-American War pushed the index up approximately 10% within ten days, while news of U.S. entry into the World Wars typically triggered panic selling.
However, beginning with the Korean War, this direct impact gradually faded. From November 1950 to February 1951, despite UN forces retreating, U.S. stocks continued to rise. The reason was the restart of the post-WWII stagnated economy: U.S. real GDP grew about 8.7% in 1950 and remained above 8% in 1951. The fiscal expansion brought by the war acted as a catalyst for economic recovery.
This shift became even more pronounced during the Vietnam War. The Battle of Ia Drang in November 1965—the first major confrontation for U.S. troops—did not significantly impact the market. The Tet Offensive in early 1968 failed to prevent U.S. stocks from reaching new highs. What truly drove the market were the Federal Reserve's credit tightening in 1966 to counter war expenditures, and the economic recessions of 1969-1970 and 1973-1975. War sentiment had yielded to macro policy and corporate earnings.
The Gulf War provides the clearest example of "economic transmission." After Iraq invaded Kuwait in August 1990, oil prices spiked, fueling recession fears and driving S&P 500 valuations to a bottom. When coalition forces bombed Baghdad in January 1991, oil prices retreated to pre-war levels, and the stock market rallied in tandem. During the war, the Dow moved almost perfectly inversely to crude oil prices—the market was trading the trade-off between inflation and growth.
The Afghanistan War (2001) and Iraq War (2003) further validated this pattern. A highly symbolic moment was the killing of Osama bin Laden in May 2011—arguably the most significant breakthrough in the Afghanistan War. The next day, the Dow fell a mere 0.02%, and the S&P 500 declined 0.18%. The market largely ignored the news.
In summary, the reaction of U.S. stocks to war has followed a clear evolutionary path: from "sentiment-dominated" to "economically-transmitted." Early wars directly shook markets with news of victories or defeats, but since the Korean War, equities have increasingly focused on real economic variables like fiscal expansion, inflation expectations, oil price volatility, and monetary policy.
War itself is no longer the reason for market moves; how war affects growth and costs is what the market truly prices.
Which sectors profit during wars? The answer has changed. During WWII, coal was the lifeblood of war, with bituminous coal's share rising from 43.8% pre-war to 48.9%, and the sector gaining 415% cumulatively.
In the Korean War, oil took over as the leading sector, with crude extraction and processing occupying the top two spots for gains, their profits climbing steadily from mid-1950 to the first half of 1952. During the Vietnam War, the collapse of the Bretton Woods system forced dollar devaluation, and OPEC was allowed price hikes to compensate. The oil extraction sector surged during the dollar crisis from late 1970 to early 1973, racking up a staggering 1378% gain for the entire war period.
The Kosovo War continued this pattern, with materials and energy sectors performing best.
The Gulf War was the sole exception—the transmission path shifted to an indirect "oil price → economic outlook" model. Consumer staples and healthcare sectors outperformed in the short term, while energy, materials, and industrials—capital-intensive sectors—lagged.
A notable trend is that as the U.S. economy has expanded, the defense industry has evolved from a growth engine to a fundamental component of the economic base. The marginal contribution of any single war to the aggregate economy has consistently declined, and market drivers have increasingly ceded ground to macro variables like inflation, interest rates, and fiscal deficits.
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