Do Defense Stocks Go Up During War?

This article answers do defense stocks go up during war by reviewing historical patterns, economic mechanisms, empirical studies, sectoral differences, ETFs, investment implications and research ca...

2026-01-15 10:07:00

By Ravi Clark

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Do Defense Stocks Go Up During War?

This article examines whether publicly traded defense (aerospace & defense) companies and related ETFs tend to rise when armed conflicts or major geopolitical crises occur. Early in this piece we address the direct question: do defense stocks go up during war, and then explain why patterns often differ by conflict scale, firm type, and market context. Readers will gain a practical, neutral overview of historical episodes, the economic mechanisms that drive moves, empirical evidence from event studies, how ETFs behave, and the key risks and methodological limits to drawing firm conclusions.

As of 2025-01-15, according to financial media reports, several defense-focused ETFs and large defense primes experienced intraday spikes amid renewed geopolitical tensions, a pattern consistent with prior episodes.

Overview and scope

In this article "defense stocks" refers to publicly traded firms whose principal business is supplying military goods and services. That includes:

Large prime contractors (major aerospace & defense companies that supply aircraft, ships, land systems, missiles, and large systems integration).
Subsystem suppliers and specialized vendors (munitions producers, electronic warfare, communications, logistics and maintenance providers).
Pure-play defense manufacturers and companies with meaningful defense divisions.
Defense-focused exchange traded funds (ETFs) and indices that track the sector.

When we discuss "war" in this article we use a pragmatic, investment-focused scope: major interstate wars, large-scale regional conflicts, and sustained military operations that materially change expected government procurement or defense budgets. We do not analyze isolated border skirmishes with no clear budgetary implications. The timing window for our analysis ranges from the immediate market reaction (days to weeks) to medium-term performance (months to a few years) and, when relevant, longer-term budget-driven changes.

Investors and readers often ask in plain terms: do defense stocks go up during war? The short and nuanced answers are covered throughout: short-term gains are common around major escalations, but results vary by conflict scale, company exposure, fiscal politics and macro context.

Historical performance — what the record shows

Looking across major conflicts during the 20th and 21st centuries, several recurring patterns emerge. These patterns help explain why many market participants buy defense exposure during crises while others remain cautious.

Common observations across episodes:

Initial market-wide risk-off moves often produce broad sell-offs before or at the outbreak of conflict. That can pull down defense names temporarily alongside general equities.
Once the scale and expected policy response become clearer, defense names frequently rebound. The rebound is driven by expectations of higher government procurement, longer order backlogs, and clearer revenue visibility for certain firms.
Short-term rallies are more consistent than long-term outperformance. Over multi-year horizons, defense sector returns depend on fiscal choices, firm fundamentals, commercial exposure, and global demand.

Historical examples below illustrate these patterns and the key caveats.

Case studies

World War II to 20th century conflicts

During World War II and other large 20th-century mobilizations, governments massively expanded defense procurement. Public firms supplying vehicles, aircraft, munitions and shipbuilding saw large, sustained increases in orders. For many of these firms revenues and profits rose sharply as civilian production shifted to military production.

Market infrastructure and investor equilibria were different in earlier eras, but the core mechanism — a sudden, large and sustained increase in government demand — supported durable earnings growth for defense suppliers. That makes early mobilizations a useful historical example of how procurement scale matters.

Korean War and Vietnam era

Korean War and Vietnam-era spikes show a mixed picture. Some primes expanded rapidly on government contracts. However, protracted conflicts with unclear end-states and variable budgetary discipline produced uneven returns and post-war contractions as spending tapered.

These episodes illustrate that longer conflicts do not guarantee steady, long-term stock outperformance. Procurement timing, cost inflation, and political changes mattered greatly.

Gulf War (1990–1991) and 2003 Iraq invasion

The 1990–1991 Gulf War and the 2003 Iraq invasion are commonly cited as examples where short-term rallies in defense stocks occurred. In both cases investors initially reacted with broad market caution. Once military objectives, coalition contributions, and expected procurement were clearer, many defense-related equities and ETFs rallied.

Medium-term behavior was heterogeneous. Firms heavily tied to rapid munitions and logistics benefited early. Longer-term gains depended on sustained follow-on orders, reconstruction contracts, and follow-up budgets.

Afghanistan/Iraq post-2001 operations

Sustained operations after 2001 produced large backlogs and budgets for many defense contractors over a decade. However, the revenue boost varied across firms. Companies providing services, logistics, and armored vehicles often saw sustained demand. Others with more cyclical commercial exposure had mixed outcomes.

This period shows how prolonged military engagement can increase defense-sector revenue visibility across several years, but also how market pricing factors in anticipated future budget retrenchment.

2014–present events: Russia–Ukraine and regional escalations

Since 2014, the Russia–Ukraine conflict and intermittent regional escalations in the Middle East produced a recognizable pattern: immediate spikes in risk premium pushed many equities lower at first, then defense-specific ETFs and visible primes registered rallies as governments signaled increased procurement.

ETF flows and headline-driven trading amplified short-term moves. In several cases initial rallies later retraced when markets concluded the procurement timelines or when other macro risks dominated.

Recent 2024–2026 episodes

As of early 2025, financial media reported renewed investor interest in defense equities across Europe and the U.S. after a sequence of geopolitical incidents and policy announcements. Short-term surges in defense ETFs and large primes were recorded on days when allied governments signaled material procurement packages or accelerated deliveries of defensive systems.

These recent episodes follow the familiar pattern: rapid headline-driven gains followed by profit-taking or re-rating as policy clarity and budget timing become clearer.

Economic and market mechanisms behind defense-stock moves

Understanding why defense names move during conflicts requires separating the economic drivers from market psychology.

Increased government procurement and predictable revenue

A central mechanism is expected increases in government procurement. Wars or major conflicts often lead governments to accelerate orders for aircraft, naval vessels, missiles, munitions, and sustainment services. Multi-year contracts and increased backlogs raise the visibility of future cash flows for certain suppliers.

Expectations of predictable revenue streams make valuation models more optimistic for firms with large defense revenue shares. That is why primes with strong government contract pipelines often experience sharper rebounds once procurement clarity appears.

Sector-specific demand dynamics

Different segments react differently:

Munitions and expendables: Near-term demand surges and production ramp-ups are common, but these businesses can be capex- and capacity-constrained.
Aircraft, missiles and major platforms: Longer lead times and multiyear procurement programs mean benefits are realized over several quarters or years.
C4ISR, communications, cybersecurity: These areas often see durable demand as countries invest to modernize capabilities.
Services and logistics: Sustained operations increase demand for maintenance, logistics contractors, and field services.

Procurement cycles and industrial capacity constraints therefore shape which firms benefit and when.

Market sentiment and safe-haven/rotation effects

Investor behavior amplifies moves. Common patterns include:

Flight-to-quality within equities: When markets fear macro shocks, investors may rotate into sectors perceived as having predictable government revenue.
Tactical buying by headline-driven traders: Short-term flows into defense ETFs can produce outsized moves relative to fundamentals.
Media coverage and analyst attention: High visibility of procurement announcements causes quick repricing.

Both behavioral flows and fundamental expectations interact to create price dynamics.

Prewar jitters vs post-announcement rebounds

Markets may sell off during the period of uncertainty before a conflict (risk-off), pulling down most equities, including defense names. When policy responses and procurement plans are announced — or when the intensity and expected duration of operations become clearer — defense stocks often rebound. The initial drop plus subsequent rebound is a recurring pattern seen in many episodes.

Empirical evidence and academic studies

Researchers typically use event-study methodologies to quantify defense-stock reactions to conflicts. Key elements of such studies include defined event dates (announcement, attack, or mobilization), abnormal return windows (days to months), and comparison benchmarks.

Common findings reported in the literature and practitioner analyses:

Positive abnormal returns: Several event studies find statistically significant positive abnormal returns for many defense firms around large conflicts, particularly for primes with high defense revenue shares.
Heterogeneity: Effects vary by conflict size, U.S. involvement, and firm exposure. Smaller or regional conflicts often produce weaker or ephemeral effects.
Duration: Abnormal returns are often strongest in short windows (days to a few weeks). Medium-term outperformance (months to years) is less consistent.

Representative approaches include cross-sectional regressions that relate firm abnormal returns to defense revenue share, backlog, and export exposure. Many studies conclude that policy clarity and procurement commitments are important mediators.

Variation by firm type, geography and exposure

Not all defense stocks move the same way. Key dimensions of variation include:

Prime contractors vs. smaller suppliers

Large prime contractors typically have sizable backlogs, diversified program portfolios, and stronger government relationships. That gives them relatively stable revenue expectations during procurement surges.

Smaller suppliers or niche vendors may see bigger percentage revenue swings but face greater execution and single-contract concentration risk. They may therefore display higher volatility.

Commercial aerospace exposure

Companies with large commercial aerospace divisions (for example, major aircraft manufacturers with both commercial and defense business) can behave differently. Commercial weakness can offset defense strength, leading to muted net stock responses compared with pure-play defense firms.

Export markets and allied procurement

Winners in a conflict can include foreign suppliers when allied countries increase procurement. Export controls, offset agreements and foreign military sales shape which firms gain. For investors, geopolitical alignments and export pipelines are important to assess.

Regional vs global conflicts

Regional conflicts typically generate smaller and shorter-lived effects on global defense equities unless they spur broader alliances, sustained mobilization, or cross-border escalation. Major-power conflicts or crises that trigger multi-country procurement shifts have a larger and longer-lasting impact.

ETFs, indices and typical instruments for investors

Investors commonly gain sector exposure via ETFs and indices rather than single names. ETFs provide diversified exposure across primes and suppliers and are often the most liquid way to trade sector sentiment.

Common features of defense ETFs:

Composition: ETFs track indices of aerospace & defense firms, including primes, subsystem suppliers, and related industrials.
Liquidity and flows: ETF flows can amplify short-term moves around headlines. Sudden inflows to defense ETFs have driven intraday price action in past episodes.
Cost and tracking: Fees and index construction matter for medium-term holders.

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Investment implications and strategies

This section frames practical implications without offering investment advice. The goal is to clarify tactical vs strategic approaches and the associated risks.

Short-term trading vs long-term investing

Short-term trading: Traders often target headline-driven moves, using ETFs or liquid large-cap defense names to capture rapid price movements. That approach relies heavily on timing and liquidity.
Long-term investing: A longer-term allocation to defense can reflect a secular expectation of higher baseline defense spending, modernization programs, and renewed emphasis on deterrence. Long-term outcomes depend on budgets, program execution and firm fundamentals.

Both paths require assessing valuation, procurement timeline, and firm-specific risk.

Valuation and timing risks

Headline-driven spikes can push valuations above fundamentals. The timing of budget appropriations, contract award schedules, and production ramp-up can create gaps between market expectations and realized cash flows. Overpaying at a spike increases reversal risk.

Portfolio considerations

Diversification: Defense exposure should be considered alongside broader allocations to manage sector-specific shocks.
Position sizing: Given volatility around geopolitical events, prudent sizing helps limit drawdowns if sentiment reverses.
Risk management: Use of stop-losses, hedging, or staggered entry can reduce timing risk for shorter-term traders.

Risks, limits and caveats

Several important limits temper simplistic conclusions that "defense stocks always rise during war."

Political and budgetary risk

Announced procurement intentions require legislative approvals, funding cycles and implementation. Promised spending increases can be delayed, cut, or re-allocated. Congressional or parliamentary processes, competing fiscal priorities, and macro stress can restrict actual spending growth.

Macroeconomic and market context

Sector-specific drivers can be overwhelmed by broader market trends. Severe market corrections, tight monetary policy, or stagflation can pressure defense stocks despite positive procurement signals.

Conflict scale and uncertainty

The magnitude, duration, and escalation risk of a conflict determine economic impacts. Small, short-lived skirmishes may have negligible fiscal consequences relative to major multi-year campaigns.

Ethical considerations

Investors should consider the ethical implications of investing in companies that profit from armed conflict. This is a personal and institutional decision that may influence portfolio choices or the use of screened funds.

Methodological considerations for research

Researchers and analysts face hurdles when isolating the effect of war on stock prices.

Event selection and windows

Choosing the event date (first attack, formal declaration, major escalation, or policy announcement) and the return window length (days, weeks, months) materially affects measured abnormal returns.

Confounding events and attribution

Simultaneous macro news, sector-specific earnings, or unrelated shocks can confound attribution. Careful controls and robustness checks are necessary.

Survivorship and selection biases

Studies focusing only on firms that survived or those with historically large returns can overstate effects. Comprehensive samples and pre-specified tests help reduce bias.

Conclusion — a balanced answer

So, do defense stocks go up during war? Short answer: they often show short-term gains around major conflicts or sustained geopolitical tension. Those gains are driven by expectations of higher government procurement, clearer revenue visibility for some contractors, and investor flows into defense ETFs.

A longer answer requires nuance: outcomes are heterogeneous. The size and duration of the conflict, the role of allied procurement, the fiscal and legislative process, firm-level exposure (prime vs supplier vs commercial), and macro conditions all shape realized returns. Short-term spikes are common, but medium- and long-term performance depends on whether procurement translates into sustained orders, whether firms execute at cost, and whether markets correctly price future cash flows.

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