Defense Stocks Rally 40% as Iran War Enters Third Week
Lockheed Martin, RTX, and Northrop Grumman surge on ammunition restocking needs. The conflict has driven the best defense sector run since early 2022.
Defense contractors are having their best quarter in years.
Lockheed Martin has climbed nearly 40% since January as tensions with Iran escalated toward the military conflict that began February 28. RTX is up 25% over the same period. Northrop Grumman has gained 30%. The Philadelphia Stock Exchange Defense Index is outperforming every other sector year-to-date.
This isn't the speculative rally we saw after Trump's $1.5 trillion budget proposal in January. That was about future spending. This is about immediate demand.
The Restocking Thesis
Bernstein put out a note this week calling ammunition restocking the next catalyst. The logic is straightforward: missiles fired need to be replaced. The U.S. military has expended significant ordnance supporting Israeli operations and conducting direct strikes on Iranian targets.
Lockheed makes Patriot missiles at roughly $4 million per unit. The company signed a deal in January to quadruple THAAD interceptor production from 96 to 400 annually. Each THAAD round costs $12.77 million. The Strait of Hormuz blockade has forced naval operations that consume munitions at wartime rates.
RTX builds the Patriot radar and ground systems that direct those missiles. Northrop makes the Global Hawk drones providing surveillance over the Persian Gulf. All three companies have backlogs stretching years into the future—backlogs that now look more likely to convert to revenue.
What the Stocks Show
| Stock | YTD Gain | Friday Close |
|---|---|---|
| Lockheed Martin (LMT) | +38% | $612.40 |
| Northrop Grumman (NOC) | +30% | $548.75 |
| RTX Corporation (RTX) | +25% | $128.90 |
| General Dynamics (GD) | +22% | $318.50 |
| L3Harris (LHX) | +18% | $245.20 |
The moves aren't just about this conflict. Defense stocks benefit from the broader shift in geopolitical risk perception. Europe is rearming. Asian allies are increasing defense budgets. The Iran war accelerates procurement decisions that were already moving forward.
The Energy Entanglement
Defense stocks have an unusual correlation right now: they rise when oil spikes. That's because higher oil prices signal continued conflict, and continued conflict means sustained demand for defense products.
Brent crude above $100 is painful for most of the market. It raises input costs, pressures consumer spending, and complicates the Fed's inflation fight. But for Lockheed and RTX, expensive oil means their products are being used.
This creates a hedge effect in portfolios. Owning defense alongside energy-sensitive sectors partially offsets the damage from the oil shock. It's a rotation we've seen institutional investors execute over the past two weeks.
The Bear Case
Defense rallies on conflict can reverse quickly on peace.
If Iran's leadership changes or a ceasefire emerges, these stocks could give back gains fast. The market volatility cuts both ways—the same war premium that lifted shares would evaporate on de-escalation.
Valuation also matters. Lockheed trades at 22x forward earnings, elevated compared to its historical range around 18x. RTX is at 24x. These aren't bubble multiples, but they assume the elevated spending environment persists.
Congress must still appropriate the funds. Defense budgets are annual exercises in political compromise. The $1.5 trillion Trump proposed won't pass unchanged. What actually gets spent may disappoint expectations baked into current prices.
For now, the momentum favors defense bulls. But this is a trade tied to geopolitics, and geopolitics can shift overnight.