Defense Stocks Plummet Despite War in Iran: Why History Matters More Than Missiles

The recent war in Iran has left investors in the defense tech sector reeling, with top contractors like Northrop Grumman and Lockheed Martin seeing significant losses despite the Pentagon’s massive spending plans. The $37.5 billion tab on the conflict is a staggering figure, but it seems that even this historic outlay of funds cannot guarantee returns for those betting on defense windfalls.

At first glance, the selloff in defense stocks might seem counterintuitive given the unprecedented levels of munitions fired and the Trump administration’s push for a $1.5 trillion defense budget – a 42% increase. However, experts point out that much of this “good news” was already priced into the market, leaving investors searching for the next big payday.

History shows that investor gains are often made long before conflicts begin, not after they’ve started and become unpopular. When Russia invaded Ukraine in February 2022, several contractors initially outperformed, but much of those gains had already occurred before the invasion. Afterward, defense stocks largely moved in line with the broader market.

Being positioned before a war starts is crucial for investors chasing the next windfall, according to Mike Derrios, executive director of the Baroni Center for Government Contracting at George Mason University. “Investor alpha is most likely gained when investments are made before wars and before legislated funding, not after a war has begun,” he notes.

Many defense companies aren’t pure-play military businesses. Boeing, for example, derives substantial revenue from its commercial aviation business, making separate economic conditions just as impactful on its stock as Pentagon spending.

Potential changes to the U.S. political environment could sway investment. “If the public reacts even more negatively to a resumption of fighting with Iran, that’s going to bode even worse for GOP prospects in the midterm elections – what will that say about defense in ‘27 and ‘28?” asks Byron Callan, managing director at Capital Alpha Partners.

The broader economy also remains a risk: “If energy is going to spike again and you’re going to see higher inflation, you’re going to see higher interest rates as the Fed tries to tamp that down.” Many of the defense players are entering the second half of the year on strong footing thanks to enlarged order books – but this might not be enough to guarantee future success.

The investment boom in new generation defense technology startups has reshaped the sector, creating a growing crop of multibillion-dollar companies. Companies like Anduril, Shield AI, and Saronic are among Silicon Valley’s fastest-growing defense startups. However, they still face significant challenges in terms of scalability and contract procurement.

Investors would do well to remember that history matters more than missiles when it comes to investing in defense stocks. Being positioned before a conflict starts is crucial, and understanding the complexities of the sector – including the role of venture capital and the emergence of new players – is key to making informed investment decisions.