The Guns Are Firing. Why Aren't the Stocks?

Defense stocks should be the obvious trade in a shooting war, but the obvious trade has a catch.

The Iran War is burning through America's missile stockpile at a punishing pace. The first four days of strikes reportedly cost nearly $11 billion, including some $5.7 billion in interceptors alone.

Pentagon officials had already been sounding the alarm on depleted stockpiles well before the conflict, and multiyear replenishment contracts with the major primes were signed earlier this year. The math should be simple. It isn't.

The five biggest defense contractors — Lockheed Martin $LMT ( ▼ 1.58% ), Northrop Grumman $NOC ( ▼ 1.01% ), General Dynamics $GD ( ▼ 1.1% ), Boeing $BA ( ▼ 3.01% ), and RTX $RTX ( ▼ 1.28% ) — are down about 1% on average since the war began. The problem is that these stocks were already priced for the conflict.

The group is up roughly 50% on average since the June 2024 presidential debate, and four of the five now trade at around 26x forward earnings, near historic highs.

Global tailwinds are real: the US defense budget hit a record $1 trillion this fiscal year, NATO members raised military spending targets to 5% of GDP, and Japan, South Korea, and India have all lifted their own targets. But a lot of that was already in the price.

It also matters where defense dollars are flowing. Within the expanded 2026 US military budget, spending on legacy programs is flat while newer technologies — space, AI, drones — are growing over 20%, according to RBC Capital Markets $RY ( ▼ 0.71% ) analyst Ken Herbert.

The US and Gulf allies have been using multimillion-dollar missiles to intercept drones that cost tens of thousands. Smaller defense tech names have noticed. The equal-weight State Street SPDR S&P Aerospace and Defense ETF $XAR ( ▼ 3.4% ) and the prime-heavy iShares US Aerospace and Defense ETF $ITA ( ▼ 2.09% ) are both up substantially over the past 12 months.

There's also a near-term earnings wrinkle. An executive order from the Trump administration bars defense contractors from paying dividends or buying back stock until they can produce superior products on time and on budget. Higher capex and fewer buybacks can compress earnings per share, at least in the near term.

The war is real, the budgets are real, and the replenishment need is real. The question is whether the biggest players are the best way to own it.