By Jinjoo Lee
The Iran War should spell opportunity for makers of American weapons, yet shares of the biggest defense companies have barely budged since the conflict broke out. Investors have good reasons to be cautious.
As the war goes on, it depletes more of America's missile stockpile. The first four days alone of strikes against Iran reportedly cost nearly $11 billion, including some $5.7 billion of interceptors to shoot down Iranian missiles and drones. These include the Patriot and Thaad systems, which along with other missiles and munitions are the defense companies' bread and butter. The depletion is bad enough that the U.S. may be moving air-defense assets from South Korea.
Defense stocks, though, have barely moved. The "big five" defense primes -- Lockheed Martin, Northrop Grumman, General Dynamics, Boeing and RTX -- are down by an average of about 1% since the Iran War broke out.
Partly that is because these stocks were already pricing in a lot of growth. Markets have been bullish on arms makers since the election tipped in President Trump's favor. The five defense primes are up about 50% on average since the June 2024 debate between Trump and former President Joe Biden. Four of the five primes fetch roughly 26 times expected earnings on average, near their historic highs.
There have been plenty of reasons for investors to load up on defense stocks. Well before the Iran War, Pentagon officials were alarmed at how low the U.S. weapons stockpiles were and urged weapons makers to increase missile production rates, as The Wall Street Journal reported. Earlier this year, the Pentagon signed multiyear agreements with defense primes to boost weapons production. Big orders for missile replenishment should benefit all defense primes, but especially RTX, whose business is more missile-heavy.
A world full of hostilities has raised defense budgets everywhere. The U.S. defense budget for the current fiscal year is a record $1 trillion. The European members of the North Atlantic Treaty Organization raised their military-spending targets to 5% of GDP. Roughly half of that spending has typically gone to U.S. contractors, notes Sheila Kahyaoglu, equity analyst at Jefferies. Japan, South Korea and India have also raised their military spending targets.
Trump has even bigger spending ambitions. In January, he called for a $1.5 trillion defense budget for fiscal year 2027, though it is unclear exactly where that figure will ultimately shake out. He had said the step-up was possible thanks to revenue from tariffs, which the Supreme Court has since struck down. The administration typically sends in a budget request for the coming fiscal year in February, but that hasn't happened yet, says Jerry McGinn, director of the CSIS Center for the Industrial Base.
Not everything points to a resounding victory for defense primes. Even before this conflict, the Trump administration has shown interest in newer, nimbler defense technologies. Within the expanded U.S. military budget for 2026, spending on legacy programs is flat while the budget for newer technologies such as space, AI and drones is seeing over 20% growth, according to Ken Herbert, equity analyst at RBC Capital Markets. Defense tech has been a focus across multiple U.S. presidential administrations, though the interest has picked up in Trump's second term. "The idea is to bring in more entrants, more commercial solutions, " McGinn said.
If anything, the Iran War could tip things even more in defense tech companies' favor. The conflict has highlighted just how costly the U.S. and Gulf allies' weapons strategy is. They have been using multimillion-dollar missiles and jet fighters to intercept a barrage of Iran's Shahed drones, which cost just tens of thousands of dollars. U.S. and its Gulf allies are reportedly looking at more affordable options. While defense primes do have exposure to newer technologies, more of their revenue comes from established programs, said Herbert.
This might be one reason why smaller defense tech stocks have rallied more. Over the past 12 months, the State Street SPDR S&P Aerospace & Defense ETF $(XAR)$, an equal-weight index with higher exposure to smaller defense tech names, has risen 67%. By contrast, the iShares U.S. Aerospace & Defense ETF $(ITA)$, which has heavier exposure to the primes, is up 54%.
Another lingering concern is the Trump administration's scrutiny on how the largest defense contractors spend their money. Earlier this year, Trump issued an executive order banning defense contractors from paying dividends or buying back stock until "they are able to produce a superior product, on time and on budget." So far, companies have raised spending expectations and largely shied away from giving specific guidance around buybacks. Higher capital expenditures and fewer buybacks could pressure companies' earnings-per-share numbers, at least in the near term.
There are other risks that could arise if conflict in the Middle East is drawn out. For one, if the war proves unpopular enough to hand Democrats a victory, that could put pressure on the defense budget. Another risk is if the government turns to the Defense Production Act, an authority that it has already threatened to use on Anthropic, to compel manufacturing of weapons systems.
Rising hostilities are presenting a bullish but not entirely safe environment for weapons makers.
Write to Jinjoo Lee at jinjoo.lee@wsj.com
(END) Dow Jones Newswires
March 17, 2026 05:30 ET (09:30 GMT)
Copyright (c) 2026 Dow Jones & Company, Inc.
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