Despite the outbreak of U.S.-Iran hostilities, major global defense stocks have declined rather than advanced, as investors reassess the sector's true profit outlook.
It has been nearly two months since military strikes were launched against Iran, yet instead of continuing their upward trajectory, leading defense stocks worldwide have faced widespread pressure and retreated.
Analysts suggest that current limitations in military production capacity mean that order growth cannot quickly translate into profits. Additionally, investors remain skeptical about whether the Trump administration's proposal for a significant increase in defense budget will materialize.
Since March, shares of major U.S. defense contractors such as Lockheed Martin, Northrop Grumman, and RTX have all declined. At the same time, nearly $1 billion has flowed out of the $14 billion iShares U.S. Aerospace & Defense ETF, shifting instead into safe-haven sectors like energy and utilities.
European defense stocks have also been sold off. The MSCI Europe Aerospace & Defense Index fell 9.2% in March alone, marking its largest monthly decline in five years.
Market logic appears to be repeating historical patterns: "buy the rumor, sell the news."
This round of correction in the defense sector aligns closely with market behavior observed after numerous past military conflicts. Melius Research analyst Scott Mikus describes this phenomenon as "buy the tension, sell the war," noting similar trends followed the 2022 Russia-Ukraine conflict and the 2003 U.S.-led Iraq war.
Shares of Lockheed Martin, Northrop Grumman, and RTX had already risen approximately 50% in the year leading up to the conflict, benefiting from the Trump administration's proposed defense spending increase last year and ongoing instability in Ukraine and the Middle East.
However, since the onset of active combat, shares of the first two companies have fallen about 10% from their peaks, while Lockheed Martin has declined roughly 5%.
Steven Grey, Chief Investment Officer at Grey Value Management, commented:
The U.S. is consuming ammunition far faster than it can be produced. Defense companies may receive some funding upfront, but they typically cannot recognize profits until delivery is completed. If delivery takes years, what will drive further stock price increases?
Production bottlenecks highlight the challenge of translating strong orders into timely deliveries.
The high intensity of military operations has made the market more aware of the core constraint: production capacity.
Reports indicate that the U.S. military has used approximately 1,000 Tomahawk cruise missiles over the past two months—about 20 times the 58 missiles allocated in the U.S. Navy's annual budget. The urgent need to replenish stocks will further exacerbate the production backlogs already faced by major defense contractors.
Ron Epstein, Aerospace & Defense Analyst at Bank of America, stated bluntly:
Revenue growth for these defense companies is not constrained by demand, but by capacity.
Both companies reported sales growth for the first quarter this Tuesday, citing strong demand for defense systems. Northrop Grumman CEO Kathy Warden noted:
Growth in our defense business is driven by continued strong demand for solid rocket motors, precision munitions, conventional ammunition, and tactical missiles.
Scott Mikus pointed out that RTX's Raytheon defense unit, which produces the Tomahawk missile, stands to benefit from the Iran conflict and higher defense budgets. He also highlighted that the Pentagon's FY2027 budget request includes a proposed 189% increase in missile procurement funding.
Doubts remain over the budget outlook, casting uncertainty on the proposed $1.5 trillion plan.
In April, Trump proposed increasing the U.S. defense budget by 50%, to $1.5 trillion by 2027, but the market has reacted cautiously.
Ron Epstein explained:
The $1.5 trillion budget has not been priced into stocks because investors understand this plan has a long way to go. The process is highly unpredictable, and with midterm elections approaching, uncertainty is even greater.
At the same time, senior Trump administration officials, including Defense Secretary Pete Hegseth, while advocating for increased U.S. defense spending, have also sharply criticized major contractors for project delays and cost overruns, pledging a thorough overhaul of the Pentagon's procurement system.
Additionally, the administration recently held discussions on involving Detroit automakers such as General Motors and Ford in the weapons supply chain.
The prominent use of drones and autonomous missiles in the Iran conflict has also sparked market speculation, raising concerns that large traditional contractors may fall behind in the transition to a new generation of low-cost defense technologies.
European defense stocks are also cooling off.
The correction in European defense stocks is similarly pronounced and is compounded by region-specific policy uncertainties.
Shares of Czech weapons manufacturer CSG have fallen nearly a third since the conflict began. Germany's Rheinmetall and Renk are down about 10%, Sweden's Saab has declined around 12%, and France's Thales saw its stock fall this Tuesday after issuing weaker-than-expected earnings guidance.
Robert Stallard, an analyst at Vertical Research Partners, believes the sell-off "may be related to war-related uncertainty, with markets also worried that defense spending has reached a cyclical peak."
He further noted:
With the U.S. Defense Department requesting a 50% annual budget increase, plus an unexpected military conflict, where is the additional upside? In Europe, there are periodic fears about what impact a potential Ukraine peace agreement could have on regional defense spending trends—especially for fiscally strained countries like France and the UK.
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