Defense contractor stocks have tumbled even as Middle East tensions continue, showing that Wall Street’s typical strategy of buying military shares during conflicts had already run its course weeks earlier when investors anticipated stronger action from President Trump’s administration.
The NYSE Arca Defense index, tracking 34 American companies both large and small, dropped almost 8% last month while the broader S&P 500 fell 5%. This contrasts sharply with February 2022, when the same defense index jumped 12% following Russia’s attack on Ukraine.
Market experts say the weak showing indicates investors are cashing out after strong gains this year, rather than reflecting reduced demand or concerns about future military spending.
“A lot of conflict premium was in their valuations,” explained David Bianco, Americas chief investment officer at German asset manager DWS.
“We saw gold and oil and defense rally, part of the reason was messages from the administration, when Trump was sending the armada to the Middle East. Nobody knew anything, but they saw chances of a conflict,” Bianco added.
Bianco revealed he started cutting back his heavy position in defense stocks before Middle East fighting escalated.
Warning signs appeared well ahead of the U.S.-Israeli bombing campaign that started in late February, indicating Washington was gearing up for potential confrontation with Iran.
Reuters had documented in preceding weeks how America was strengthening military presence in the Middle East while preparing for extended operations if diplomatic efforts collapsed.
European defense companies experienced similar declines, falling 11% in March for their worst monthly performance since the pandemic. This broad selloff reflected investor fears about potential energy disruptions from the war. European defense stocks had previously rallied as governments across the continent unveiled massive military buildup plans following Russia’s Ukraine invasion.
Trump’s proposal for a $1.5 trillion military budget by 2027 far exceeds the $901 billion Congress approved for 2026, but questions remain about whether lawmakers will approve such dramatic increases.
“Nothing that has happened so far suggests that a $1.5 trillion 2027 defense budget could be exceeded. For these reasons, one should not expect upside to come from the current conflict,” wrote Bernstein analyst Douglas Harned in a recent research note.
Defense stocks have skyrocketed more than 150% from 2020 through 2025, pushing the sector to extremely high price levels.
The S&P 500 Aerospace & Defense segment now trades at roughly 32 times expected earnings over the next 12 months, significantly above the overall S&P 500’s ratio of about 20 times, based on LSEG data.
Wall Street has shown little excitement despite Pentagon efforts to increase production for restocking depleted missile and ammunition supplies.
Revenue increases will take considerable time to appear since lengthy manufacturing processes and factory limitations restrict how quickly companies can boost output, industry analysts note.
Profit growth expectations for 2026 dropped to around 12% by March’s end from approximately 15% at the start of 2026 for major contractors including General Dynamics, Lockheed Martin, Northrop Grumman, L3Harris and RTX, according to Tajinder Dhillon, head of earnings and equity research at LSEG Data & Analytics.
“The conflict would need to last longer, or expand materially, for (earnings) estimates to move higher,” stated Sameer Samana, head of global equities at Wells Fargo Investment Institute.
Apart from high stock prices, investors cite restricted manufacturing flexibility as another concern.
Richard Safran, senior analyst and managing director of aerospace and defense at Seaport Research Partners, noted that defense company funding gets redirected toward immediate operational requirements instead of modernization or development projects during active conflicts.
The Trump administration is also pushing defense contractors to focus on manufacturing rather than returning money to shareholders, creating additional uncertainty about dividend payments and stock buybacks.
The industry’s future prospects depend largely on federal budget decisions, with important spending information expected April 21, Bloomberg News reported.
