Defense Stocks Gain Momentum Amid Middle East Tensions
Defense stocks continued to climb on Monday as escalating conflicts in the Middle East sparked investor interest in potential shifts to long-term military expenditures. While these developments could mark a turning point for the defense sector, experts caution it’s too early to predict the full impact.
Historical Trends Suggest Changes in Defense Spending
Analysts highlight that geopolitical crises like this often trigger significant defense budget changes and influence the trajectory of defense equities. However, the ultimate impact depends on the evolving security landscape and the magnitude of military threats.
ETF Performance Reflects Cautious Optimism
The iShares U.S. Aerospace and Defense ETF (ITA) has surged nearly 17% since early May, boasting 27 up days against just 9 down days. Despite this robust run, the ETF has not surpassed its all-time closing high from June 9, signaling a potential pause in momentum. Similar patterns have emerged in major funds like the Invesco Aerospace & Defense ETF (PPA) and SPDR S&P Aerospace Defense ETF (XAR).
Weighing the Iran Factor and Geopolitical Risks
Part of the recent rally’s plateau may stem from perceptions that Iran’s influence has weakened. Still, there remains significant risk of renewed instability. Ongoing U.S. engagement or moves by global powers such as Russia or China to assert control could perpetuate regional unrest, driving higher global defense budgets over time.
These observations were made prior to Iran’s retaliatory attack on a U.S. military base in Qatar, which could signal further escalation.
NATO’s Role in Boosting Defense Spending
It’s not just the U.S. military budget that could elevate the defense sector. At an upcoming NATO summit, member countries are expected to increase defense spending commitments from the current 2% to 3.5% of GDP. This adjustment could inject more than $150 billion annually into procurement, with approximately two-thirds historically allocated to American defense products.
Long-Term Outlook: Defense Stocks as Reliable Performers
Despite the day-to-day news cycle and uncertainties, defense stocks have demonstrated steady, long-term gains. Over the past two and a half years, major aerospace and defense ETFs have outperformed the broader market benchmark, including the S&P 500, across multiple time frames ranging from 1 to 10 years.
This consistent overperformance underscores the sector’s resilience and potential appeal amid fluctuating geopolitical dynamics.
