The history of U.S. stock market growth is, at its core, a history of American wars.
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When the cannons sound, gold flows in by the tens of thousands. Just as the market debates whether the Middle East conflict will drag down the global economy, the S&P 500 and Nasdaq indices have once again hit new highs. What does war really mean for U.S. stocks?
The Caitong Securities report gives a straightforward answer: War and the U.S. stock market bull run are not opposed, but are more akin to symbiosis. The historical performance of the Dow Jones Index confirms this—during the Spanish-American War it rose 28%, during the Korean War it rose 26%, the Vietnam War lasted 19 years and the index still increased more than 80%, while the Afghan War spanned the 2008 financial crisis and nearly doubled during that time.
Since becoming the world's largest economy in the late 19th century, the United States has gained substantial benefits from every war except the Vietnam War. From seizing Spanish colonies in the Spanish-American War, to profiting immensely from the two world wars, then to the Gulf War and subsequent small-scale conflicts around oil resources, the U.S. completed its transformation from “war participant” to “war initiator.”
The U.S. stock market’s response to war has also followed a clear path: during WWII and earlier, wars mainly impacted markets through emotional shocks; since the Korean War, this direct effect has weakened, and wars have increasingly transmitted via economic channels such as inflation, oil prices, and fiscal deficits.
The Vietnam War is the only “loss-making” war for the U.S., fundamentally changing its war logic. Thereafter, almost every conflict the U.S. initiated shared three features: short duration, small scope, focused on oil—and all ultimately achieved their targets.
From “opportunistic looting” to proactive provocation: three turning points in U.S. war strategy
The 1898 Spanish-American War was the first major war actively initiated by the U.S. Domestic monopoly conglomerates urgently needed new markets, investment venues, and sources for raw materials, and the remnants of the Spanish empire were the best target. After the war, the U.S. gained control over Cuba and obtained the Philippine islands, Guam, and Puerto Rico. The Dow Jones Industrial Index rose 28% during the three months of war, in sync with battlefield victories.
At the outbreak of World War I, the U.S. initially remained neutral. During the market closure in July 1914, investors realized the U.S. would be the biggest beneficiary of the conflict in Europe—its distant homeland could continue production and export arms to Europe. By 1917, U.S. banks including Morgan had lent $10 billion to British and French governments to buy weapons. Despite a nearly 10% drop in the index after the U.S. entered the war in April 1917, the industrial index had already risen about 107% from its low in 1914 to March 1917.
World War II was the key battle cementing the U.S. as a global superpower. Early in the war, U.S. stocks fell due to expectations of decreased corporate profits from windfall profit taxes: Congress imposed a top rate of 95% on profits exceeding $5,000, severely suppressing the numerator in DDM calculations. Until May 1942, with the Battle of Coral Sea and the Battle of Midway changing the course of war, investors keenly anticipated the outcome, and U.S. stocks bottomed out and rebounded early. The industrial index rose 82% in the second half of the war, the transportation index rose 127%, and the utilities index rose 203%.
The Korean War was the first war the U.S. “did not win.” While arms demand spurred a weak post-WW2 economy, the U.S. military did not achieve its goals. Yet the Dow Jones Industrial Index still rose 26% during the entire war, with the transportation index soaring 86%.
The Vietnam War became the watershed, the only war the U.S. lost and did not gain from.
The U.S. defense budget soared from $49.6 billion in 1961 to $81.9 billion in 1968 (43.3% of the federal budget), the fiscal deficit increased from $3.7 billion to $25 billion, and inflation rose from 1.5% to 4.7%. The U.S. share of global GDP fell from 34% to less than 30%. After the war, U.S. war strategy fundamentally changed: no more large-scale ground wars, replaced by short-term, low-casualty, airstrike-oriented “proxy conflicts.”
Subsequent Gulf, Kosovo, Afghanistan, and Iraq wars were all initiated by the U.S. leveraging local conflicts or black swan events, mainly concentrating on the Middle East and Balkan regions. The core goals centered on controlling oil resources and arms demand.
How war affects the stock market has changed: from emotional-driven to economic-driven
During WW2 and earlier, wars often directly affected investor sentiment. In the Spanish-American War, victories in the Battle of Manila Bay and Santiago Bay pushed the index up about 10% within ten days; in the two world wars, news of U.S. entry often triggered panic-driven declines.
But starting with the Korean War, this direct effect gradually faded. From November 1950 to February 1951, Korean-American allied forces retreated repeatedly, yet the U.S. stock market continued to rise—the reason being that the stagnant economy after WW2 restarted during the Korean War: in 1950, U.S. GDP at constant prices grew about 8.7%, and remained above 8% in 1951. The fiscal expansion brought by war became a catalyst for economic recovery.
During the Vietnam War, this shift became more evident. In November 1965, the Battle of Ia Drang (the first large-scale U.S. military engagement in the war) did not significantly impact the stock market; in early 1968, the North Vietnamese “Tet Offensive” could not stop U.S. stocks from hitting new highs. What truly moved the market was the Fed’s tightening of credit conditions in 1966 to offset war expenditures, and the two recessions in 1969-1970 and 1973-1975. War sentiment had already given way to macro policy and corporate earnings.
The Gulf War provided the clearest example of “economic transmission.” In August 1990, after Iraq invaded Kuwait, oil prices surged, and the market expected a U.S. recession, with the S&P 500 valuation bottoming out. In January 1991, after coalition forces bombed Baghdad, oil prices snapped back to pre-war levels and the stock market rebounded accordingly. During the war, the Dow and crude oil prices operated almost perfectly inversely—the market traded the balance between inflation and growth.
The 2001 Afghan War and 2003 Iraq War further validated this pattern. The most symbolic moment was the killing of Bin Laden in May 2011—the most decisive event in the Afghan War, yet the next day Dow only ticked down 0.02%, and the S&P 500 dropped 0.18%. The market barely reacted to the news.
To sum up, the reaction of U.S. stocks to warfare follows a clear evolution: from “emotion-driven” to “economic transmission.” Early wars moved markets directly through news of victory or defeat, but since the Korean War, the stock market has focused more on fiscal expansion, inflation expectations, oil price volatility, and monetary policy—real economic variables.
War itself is no longer the reason for price movement; how war affects growth and costs is now the real object of market pricing.
Which industry profits during wars? The answer is changing
During WW2, coal was the lifeblood of war, with bituminous coal rising from 43.8% pre-war to 48.9%, and the industry surging 415% cumulatively.
During the Korean War, oil took over as the new protagonist, crude oil extraction and processing took the top two spots in gains, rising continuously from mid-1950 to the first half of 1952. During the Vietnam War, the collapse of the Bretton Woods system forced dollar depreciation, OPEC was allowed to raise oil prices to compensate, and the oil extraction industry broke out amid the dollar crisis from late 1970 to early 1973, rising as much as 1378% over the course of the war.
The Kosovo War continued this pattern, with materials and energy industries delivering the best returns.
The Gulf War is the only exception—transmission path shifted to an indirect “oil price → economic expectations” pattern, with consumer staples and health industries outperforming in the short term, while energy, materials, and industrials lagged badly.
An important trend to note is: as the U.S. economy grew, the defense industry shifted from growth engine to economic foundation. The marginal contribution of any single war declined relative to the total, and the stock market’s driver increasingly became macro variables like inflation, interest rates, and fiscal deficits.
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