The war isn’t over yet, but the "military-industrial stock bull market" in Europe and America is already finished.
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Since the outbreak of the US-Iran conflict, major global defense stocks have fallen instead of rising, as investors are reassessing the true profit outlook of the defense sector.
Nearly two months have passed since the US and Israel launched military strikes against Iran on the morning of February 28 (local time), yet major global defense stocks have not sustained their rally, but have generally come under pressure and retreated.
Analysts believe that current defense production capacity is limited, meaning that order growth is difficult to quickly translate into profits. Investors also have doubts about whether the Trump administration's plan for a significant increase in the defense budget can be implemented.
Since March, major US defense stocks such as Lockheed Martin, Northrop Grumman, and RTX have all declined. At the same time, nearly $1 billion has flowed out of the $14 billion iShares US Aerospace & Defense ETF and moved toward risk-averse sectors like energy and utilities.
European defense stocks have also faced sell-offs, with the MSCI Europe Aerospace & Defense Index dropping 9.2% in March, marking the largest monthly decline in five years.
Market Logic Repeats: "Buy Expectation, Sell Reality"
This sector's correction matches historical patterns seen after multiple military conflicts.
Melius Research analyst Scott Mikus defines this phenomenon as "buy the tension, sell the war," pointing out that there were similar market moves after the 2022 Russia-Ukraine conflict and the 2003 US-led Iraq war.
Lockheed Martin, Northrop Grumman, and RTX shares had already risen about 50% in the year before the conflict’s outbreak, benefiting from the Trump administration's increased defense spending proposal and ongoing turmoil in Ukraine and the Middle East.
However, after entering the actual combat phase, the first two companies' shares have retreated about 10% from their highs, while Lockheed Martin is down around 5%.
Grey Value Management Chief Investment Officer Steven Grey said:
The US consumes ammunition much faster than it produces it. Defense companies may get some funds in advance, but profits are usually only booked after deliveries are completed. If delivery takes years, what would further drive up their stock price?
Capacity Bottlenecks: Strong Orders Can’t Hide Delivery Difficulties
The high consumption of military operations has made the market more clearly aware of the core constraint of capacity.
Reports indicate that in the past two months, the US military has used about 1,000 Tomahawk cruise missiles—20 times the 58 missiles approved in the US Navy’s annual budget. The urgent need to replenish inventories will further exacerbate the production backlog major defense firms are already facing.
Bank of America defense & aerospace analyst Ron Epstein bluntly stated:
The revenue growth of these defense companies is not limited by demand, but by capacity.
Both companies reported first-quarter sales growth on Tuesday, citing strong demand for defense systems. Northrop Grumman CEO Kathy Warden said:
The growth of our defense business is driven by sustained strong demand for solid rocket motors, smart munitions, conventional munitions, and tactical missiles.
Scott Mikus pointed out that RTX’s Raytheon defense division is the producer of the Tomahawk missile and may benefit from the Iran war and higher defense budgets. He noted that the Pentagon's 2027 fiscal year budget request includes a 189% increase in missile procurement funding.
Budget Outlook Uncertain: $1.5 Trillion Plan Faces Implementation Doubts
In April, Trump proposed raising the US defense budget by 50%, to $1.5 trillion in 2027, but the market reacted cautiously.
Ron Epstein said:
The $1.5 trillion budget has not been priced in, because investors know the plan still has a long way to go. It’s an extremely unpredictable process, and with the upcoming midterm elections, the uncertainty is even greater.
Meanwhile, senior Trump administration officials, including Defense Secretary Pete Hegseth, have called for increased defense spending but have also sharply criticized project delays and cost overruns by large contractors, promising thorough reforms of Pentagon procurement mechanisms.
Additionally, the government has recently held discussions on involving Detroit automakers such as General Motors and Ford in the weapons supply chain.
The prominent role of drones and autonomous missiles in the Iran conflict has sparked market speculation and concerns that large traditional contractors may fall behind in transitioning to the new generation of low-cost military technologies.
European Defense Stocks Also Cool Down
The pullback of European defense stocks is also notable, compounded by region-specific policy uncertainties.
Czech weapons manufacturer CSG has seen its stock fall nearly one-third since the conflict began. Germany’s Rheinmetall and Renk are both down about 10%, Sweden’s Saab is down around 12%, and France’s Thales shares fell Tuesday as its performance outlook missed expectations.
Vertical Research Partners analyst Robert Stallard believes this wave of selling "may be related to uncertainty around the war, and the market is also worried that defense spending has reached a cyclical peak."
He further noted:
With the US Department of Defense budget request rising 50% and unexpected military conflicts occurring, where is the upside? In Europe, the market periodically worries that once a peace deal is reached in Ukraine, it will impact regional defense spending trends—especially for fiscally tight countries like France and the UK.
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