TLDR
- The “big five” defense contractors are down about 1% on average since the Iran War started
- The first four days of strikes reportedly cost nearly $11 billion, including $5.7 billion in interceptors
- Defense stocks were already trading near historic high valuations before the conflict began
- Spending is shifting toward AI, drones, and space — away from legacy weapons programs
- The Trump administration has restricted buybacks and dividends for contractors that miss production targets
The Iran War was supposed to be a boost for America’s biggest weapons makers. So far, it hasn’t worked out that way.
The five largest U.S. defense contractors — Lockheed Martin, Northrop Grumman, General Dynamics, Boeing, and RTX — are down about 1% on average since the conflict began. Investors appear cautious, despite what looks like a straightforward demand story on the surface.
Lockheed Martin Corporation, LMT
The war is burning through American munitions at a fast pace. The first four days of strikes reportedly cost close to $11 billion. Of that, roughly $5.7 billion went toward interceptors used to shoot down Iranian missiles and drones, including Patriot and Thaad air-defense systems.
That level of depletion is raising logistical concerns. The U.S. may be moving air-defense assets away from South Korea to cover demand elsewhere.
In theory, burning through stockpiles means more replenishment orders for the companies that build them. But investors aren’t reacting that way — and there are a few reasons why.
Stocks Were Already Priced for Growth
Defense stocks had already climbed sharply before the Iran War started. The five major contractors are up about 50% on average since the June 2024 presidential debate. Four of the five are trading at roughly 26 times expected earnings — near their historic highs.
When stocks are already priced for strong growth, new positive news often doesn’t move them higher. Much of the upside was already baked in.
There is still a strong demand backdrop. The Pentagon had been pushing for faster missile production well before this conflict. Multiyear contracts to boost output were signed earlier this year. The current U.S. defense budget is a record $1 trillion, and European NATO members have raised their military spending targets to 5% of GDP. Japan, South Korea, and India have also increased their defense budgets.
President Trump has called for a $1.5 trillion defense budget for fiscal year 2027, though the final number is still unclear. The administration has not yet submitted a formal budget request for the coming fiscal year.
The Shift Toward Defense Tech
One challenge for the big contractors is where money is actually going. Within the current U.S. military budget, spending on legacy programs is flat. Budgets for newer technologies — AI, drones, and space systems — are growing at over 20%.
The Iran War has made this tension more visible. The U.S. and its Gulf allies have been using expensive interceptors and fighter jets to take down cheap Iranian Shahed drones that cost just tens of thousands of dollars each. That mismatch is pushing decision-makers to explore lower-cost alternatives.
Smaller defense tech companies have benefited from this shift. Over the past 12 months, an ETF with higher exposure to smaller defense tech firms rose 67%, compared to 54% for an ETF weighted toward the larger contractors.
The Trump administration has also placed restrictions on how defense primes manage their finances. An executive order issued earlier this year bars contractors from paying dividends or buying back stock until they can demonstrate they are delivering products on time and within budget. That could weigh on earnings per share in the near term.
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