By Max Motz
The iShares Aerospace &amp; Defense exchange-traded fund profits from the U.S and global military buildup
Defense-sector stocks are outperforming amid the Iran conflict and heightened geopolitical tensions.
The U.S. government is not just leaning on these companies to produce more weaponry quickly - it's also earning profits from some of them.
Geopolitical conflict shows no signs of calming down. That's good news for the defense sector.
The iShares Aerospace &amp; Defense exchange-traded fund ITA has added 12% this year through March 10, beating the S&amp;P 500's SPX 0.9% loss. In those 10 weeks, there's been no shortage of global instability: The U.S. captured Venezuelan leader Nicolás Maduro, talked about taking over Greenland and attacked Iran - all of which has turned the outlook for defense stocks bullish.
Were ITA to hold this magnitude of outperformance for the full year, it would post its best five-year calendar performance relative to the S&amp;P 500 on record.
That level of outperformance does come with an expensive valuation. ITA currently trades at 39 times projected 12-month earnings, above its 10-year average of 25. The S&amp;P 500, meanwhile, is trading at multiples of 21, above its 10-year average of 20.
In typical circumstances, enthusiasm for defense stocks would be ahead of fundamentals - but that might not be the case now.
As the conflict drags on in the Middle East, it's becoming clearer that heightened geopolitical tensions are the new norm. U.S. military contractors stand to gain from ramped up hostilities, with seven of the world's 10-largest publicly traded companies in the aerospace and defense industry based in the U.S.
Those seven are all held in ITA's portfolio, and among the top performers so far this year. Shares of Lockheed Martin (LMT) have added 35%; Northrop Grumman (NOC) gained 29%; Howmet Aerospace (HWM), up 24%; RTX (RTX), up 13%; GE Aerospace (GE) gained 6.0%; General Dynamics (GD) gained 5.6%, and Boeing (BA), up 0.3%.
Defense stocks usually rally ahead of the broader conflict but gains dwindle after the start of the war, as was the case during both the Cold War and the Vietnam War. The most prominent reason is that governments - the biggest customers of defense companies - wield an outsize influence over their fortunes. Even if contracts have been negotiated, they can be renegotiated, which has hurt shares of military contractors in the past.
What could help now is that the U.S. government is not just leaning on these companies to produce more weaponry quickly - it's also earning profits from some of them.
For example, in late January, Lockheed Martin announced a profit-sharing agreement with the U.S. government to boost production of air-defense missiles by more than three times the current rate of production. Agreements of that nature, despite limiting margins, generally spur production volume and growth as the excess profits are reinvested back into the company.
President Donald Trump met with some military contractors last week, including Lockheed Martin, L3Harris Technologies (LHX) and RTX, and asked them to quadruple production. In L3Harris' case, the administration has invested $1 billion to increase production of rocket motors used in manufacturing missiles, in return for a small equity stake.
Meanwhile, RTX, formerly Raytheon Technologies, has also received U.S. government support in the form of a $1 billion contract modification to continue to develop and produce its Lower Tier Air and Missile Defense Sensors, expected in early 2030.
Defense companies don't receive profits on work that hasn't been done yet, but they are shielded from major losses via &#34;make-whole&#34; provisions.
Military contractors need more stable government support than other industries because of their extremely long and expensive R&amp;D cycles. Aircrafts, submarines, weapons, missiles and drones can cost tens of billions of dollars and need multiple decades to develop before moving even a single unit.
With the U.S. government firmly in their corner, defense stocks now help give portfolios a solid offense.
Max Motz is a macro data scientist at Fundstrat Global Advisors, an investment research firm. You can read his disclosures here.
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-Max Motz
This content was created by MarketWatch, which is operated by Dow Jones &amp; Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.
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03-11-26 1322ET

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The iShares Aerospace & Defense ETF (ITA) has gained 12% this year, outperforming the S&P 500 amid rising geopolitical tensions and military conflicts. Major U.S. defense contractors like Lockheed Martin and Northrop Grumman have seen significant stock increases. The U.S. government is boosting production and profits for these companies, which are expected to benefit from ongoing military engagements. Despite high valuations, the defense sector is viewed as a safe investment as global instability persists.

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