Think Defense Investing Strategies Amid Geopolitical Conflict

The 2026 Iran conflict, which lasted approximately ten days, has significantly influenced the performance and outlook of global defense stocks. While these stocks experienced strong gains as geopolitical tensions flared, they are expected to give back much of those gains as the conflict winds down and Iranian offensive capabilities are substantially degraded. Reports indicate that more than 75% of Iran's missile launchers were destroyed and its missile stockpile was significantly depleted, leading to a 90% drop in missile attacks on neighboring regions.Despite the potential for a short-term market correction, the urgent need for munitions restocking remains a primary driver for the defense sector. The heavy utilization of tactical weapons and interceptors during the hostilities has created a massive backlog, prompting discussions between government officials and top defense executives about ramping up production capacity. For major contractors, this environment is expected to transition initial production frameworks into definitive, long-term contracts.Historically, defense stocks have demonstrated a consistent pattern of outperforming the broader market during periods of active conflict. During the wars in Afghanistan and Iraq, defense contractors outperformed the S&P 500 by as much as 58%, often seeing their share prices increase three to twelve times over multi-decade periods. However, once conflicts conclude and defense budgets normalize, these stocks typically undergo a mean reversion, performing in line with the general market.In 2026, global military expenditure reached record levels, totaling approximately $2.7 trillion, or 2.5% of world GDP. This structural lift in spending is driven by NATO rearmament commitments and military modernization efforts in various world regions. Within this landscape, individual company performance has been mixed:Lockheed Martin maintains a record backlog of $194 billion and projects strong free cash flow for 2026, which is expected to comfortably cover its $3 billion dividend commitment.Northrop Grumman has seen significant momentum with a 27% year-to-date gain, bolstered by robust earnings and its role in advanced systems like the B-21 bomber.RTX Corporation continues to benefit from its diversified portfolio of engines and missile systems, though it faces challenges such as supply chain constraints.Boeing has struggled with multibillion-dollar losses tied to fixed-price development contracts, despite the general sector rally.The broader market has also felt the impact of the conflict, with initial spikes in oil prices and bond yields. However, losses to balanced 60/40 investment portfolios have been relatively modest compared to previous historical shocks. Strategists suggest that for a robust portfolio in the current decade, investors should maintain an equal split between assets exposed to innovation (such as AI and tech), those protecting against inflation (like gold and infrastructure), and those focused on risk mitigation (such as quality equities and safe-haven currencies).The nature of modern warfare is also evolving, with AI, drones, and cyber capabilities blurring the distinction between civilian and military applications. This technological shift has introduced complex ethical dilemmas for investors, as financial gains in the defense sector often coincide with human suffering. Consequently, some investors are adopting strategies to exclude companies associated with prohibited weapons or specific jurisdictions, while others view maintaining a strong defense capability as a necessary deterrent that supports long-term global stability.Become a supporter of this podcast: https://www.spreaker.com/podcast/the-money-lab--6886555/support.