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Picture this: It’s a quiet Saturday evening. You’re probably scrolling through Netflix, wondering whether to watch another episode of that series you’ve been binge-watching. But halfway across the world, history is being written. The US launched “Operation Midnight Hammer” – striking three Iranian nuclear facilities at Fordow, Natanz, and Isfahan using more than 125 aircraft, including seven B-2 Spirit stealth bombers that flew 18 hours from the US.
By Monday morning, while most stocks were treading water, defense contractors were having a mixed but notable day. Since Israel’s conflict with Iran escalated, Lockheed Martin stock has gained about 3.6%, RTX has risen 1.8%, Northrop Grumman climbed 2.3%, and L3Harris gained 2.8%. Some of these stocks have already surged dramatically – RTX is up almost 27% in 2025 alone.
But here’s the million-dollar question: Why do defense stocks move so dramatically when geopolitical tensions heat up? And more importantly, what does this mean for the future of warfare and investing?
The Logic Behind the Madness
Let’s start with the basics. When countries start flexing their military muscles, they need weapons. Lots of them. And guess who makes these weapons? Companies like Lockheed Martin, RTX (formerly Raytheon), and Northrop Grumman.
Operation Midnight Hammer perfectly illustrates this. The mission used Northrop Grumman’s B-2 Spirit stealth bombers equipped with Boeing’s GBU-57 Massive Ordnance Penetrators – 30,000-pound “bunker buster” bombs. It was the first operational use of these massive weapons. The B-2s dropped 14 of these MOPs across the three Iranian sites, while a Navy submarine fired “more than two dozen” RTX-made Tomahawk cruise missiles.
Think of it this way: When you’re stressed, you might stress-eat chocolates. When countries are stressed, they may stress-buy missiles, fighter jets, and defense systems. The US used about 75 precision-guided weapons during this single operation – each costing hundreds of thousands to millions of dollars.
On the backdrop of the geopolitical tension, global defense spending has reached levels not seen since the Cold War.
From the trenches in Ukraine to the South China Sea standoffs and Middle East airstrikes, governments are preparing for longer, messier conflicts. But this isn’t just about guns and tanks anymore—it’s about artificial intelligence, autonomous drones, space shields, and cyber warfare. And at the center of this military modernization sits a trillion-dollar question for investors: Is now the time to buy into U.S. defense stocks?
The World is Spending—Like Never Before
Let’s begin with some numbers. According to PwC’s 2025 Global Aerospace and Defense Outlook, total global defense spending touched a record $2.2 trillion in 2024. For perspective, that’s more than the GDP of India’s entire manufacturing sector. And the U.S. alone contributed 39% of that spend, reaffirming its position as the world’s biggest military spender.
But here’s what’s really interesting—this surge in spending isn’t driven just by hot wars. It’s also coming from nations preparing for future conflicts. NATO allies have raised their defense targets from 2% to as much as 5% of GDP by 2035. In the U.S., discretionary defense budgets are expected to cross $1 trillion by FY26. The message seems clear: defense is no longer a cyclical budget line. It’s a core strategic priority.
But Revenue ≠ Profit
You’d think that with so much money pouring in, defense companies would be laughing their way to the bank. But the truth is… they’re not.
Sure, revenue is growing. The top 100 aerospace and defense companies clocked $922 billion in sales in 2024, up nearly 9% year-on-year. But profits? They’re a different story. PwC notes that operating margins fell to 6.9%, the lowest since 2017. And J.P. Morgan warns that we’re not just looking at a margin problem—we’re staring at a full-blown execution crisis.
For instance, Lockheed Martin had to take a $2 billion charge on a classified program. Boeing Defense reported a $3.6 billion loss. And across the board, cost overruns, production delays, and labor shortages are hurting even the most well-funded firms. It’s a strange paradox—record demand but shrinking profitability.
The Battlefield is Getting Smarter
What’s changing, then? Everything.
Today’s wars aren’t just fought with tanks and fighter jets. They’re fought with algorithms, low-cost autonomous drones, AI-powered targeting systems, and satellite-based missile shields. Traditional defense contractors are now competing with software startups.
Take the Replicator Initiative for example. The U.S. Department of Defense wants to deploy thousands of autonomous drones by 2026—fast, cheap, and AI-driven. Or consider the “Golden Dome”, a homeland missile defense system based in space, powered by next-gen satellites. Even traditional fighter jet programs like the F/A-XX are being designed to fly alongside autonomous drones in combat.
All of this has opened the door for companies like Palantir, AeroVironment, and Anduril. They’re not old-school defense names. But they’re seemingly the new backbone of military innovation.
Trump’s New Rules Are Shaking the Sector
If the technology shift wasn’t enough, 2025 brought a wave of policy upheaval.
In April, the Trump administration issued three sweeping executive orders. The first? Cancel any defense program that’s 15% over budget or behind schedule. That immediately put several big Navy shipbuilding contracts under threat. Second, fast-track arms exports to allies like India, Taiwan, and Eastern Europe. And third, a “Buy American” mandate—which now requires 75% domestic companies in defense manufacturing.
The consequences? Mixed. Smaller U.S.-based firms could see more orders. But global supply chains—already under stress—might snap. Companies heavily dependent on Chinese rare-earths or semiconductors are in for a bumpy ride. According to J.P. Morgan, even with full U.S. production capacity by 2027, there’ll still be a 30% supply shortfall for critical defense components.
Demand Is Booming, But Can Supply Keep Up?
This supply-demand mismatch seems one of the biggest risks in the sector today.
For example, China recently banned exports of rare-earth magnets—a critical component in everything from missiles to fighter jets. Tariffs are back on semiconductors and specialty alloys. And while the Pentagon’s “mine-to-magnet” initiative is underway, the results won’t come fast enough.
That means even companies with strong order books can’t always fulfill contracts. It’s like having full restaurant reservations, but no ingredients to cook with.
So Where’s the Opportunity?
Let’s break it down.
If you’re looking for stability, the large-cap names are still strong bets.These firms may not grow fast, but they offer contract security, dividends, and long-term visibility.But if you’re chasing growth, you’ll want to look at the disruptors:
If you’re in it for the short term, you’ll need to brace for volatility. Rising tariffs, policy shake-ups, and supply chain disruptions can rattle stocks without warning.
But if you’re in it for the long haul? The case for U.S. defense stocks could be compelling.
We’re entering a decade defined by geopolitical tensions, military modernization, and a complete rethinking of how wars are fought. That means demand is sticky. Government contracts are multi-year. And innovation is accelerating.
So yes, now could be a good time to start building a position—but do it with clarity:
- Large-caps are typically for safety.
- Add tech-first mid-caps could be used for growth.
- And stay alert to policy signals, supply chain news, and quarterly delivery metrics.
Because in defense, contracts are written in advance… But returns are earned in real time. However, please consult with your financial advisor for specific advice for your portfolio concerning defense stock suitability.
Disclaimer – This article draws from sources such as the Financial Times, Bloomberg,and other reputed media houses. Please note, this blog post is intended for general educational purposes only and does not serve as an offer, recommendation, or solicitation to buy or sell any securities. It may contain forward-looking statements, and actual outcomes can vary due to numerous factors. Past performance of any security does not guarantee future results.This blog is for informational purposes only. Neither the information contained herein, nor any opinion expressed, should be construed or deemed to be construed as solicitation or as offering advice for the purposes of the purchase or sale of any security, investment, or derivatives.The information and opinions contained in the report were considered by VF Securities, Inc.to be valid when published. Any person placing reliance on the blog does so entirely at his or her own risk, and does not accept any liability as a result.Securities markets may be subject to rapid and unexpected price movements, and past performance is not necessarily an indication of future performance. Investors must undertake independent analysis with their own legal, tax, and financial advisors and reach their own conclusions regarding investment in securities markets.Past performance is not a guarantee of future results
