Defense stocks have floundered since the Iran war began. Here’s why
Defense stocks haven’t been the slam-dunk play some investors expected as the U.S.-Iran war broke out. The iShares U.S. Aerospace & Defense ETF (ITA) has dropped about 12% since the start of March, when the Middle East conflict began escalating following the U.S.-Israeli strike on Iran. The S & P 500 added 3.5% over the same period. ITA .SPX 3M mountain ITA vs. the S & P 500, 3-month The ETF fell more than 1% on Tuesday, on track for its sixth negative day of the last seven. The fund is now near its flatline for 2026, meaning it could snap a five-year win streak. Great expectations Investors were spooked by a recent batch of earnings reports that didn’t meet the high bar set by Wall Street. They also are questioning where U.S. government spending heads from here and how much further upside defense stocks can offer. RTX fell more than 11% last week after full-year guidance for adjusted sales missed Wall Street’s forecast. Lockheed Martin tumbled more than 13% over the same period on weaker-than-anticipated earnings for the first quarter. Both stocks recorded their worst weeks since 2020. Bank of America analyst Ronald Epstein said earnings expectations for the sector were “skewed too high,” resulting in post-release sell-offs. He said investors are now wondering if “peak defense” has been reached. “The reported numbers were generally ok,” Epstein wrote to clients. “But there were company specific execution issues, concerns about margins, cash flow and a perceived lack of short-term positive catalysts.” LMT RTX 1M mountain Lockheed Martin and RTX, 1-month War variables Adding to woes is worries about what the uncertain state of geopolitics means — specifically with the wars in Iran and Ukraine — for an industry known for weapon production. “The possibility of peace in Iran (or status quo holding) and Ukraine are good for humanity, but not great for defense,” Epstein wrote. To be sure, Epstein said this view overlooks the years of demand that would be required to rebuild stockpiles. Epstein noted that Lockheed Martin and RTX both saw backlogs rising year over year. Domestically, Epstein said investors are growing concerned that defense reconciliation budget may not be passed before November’s midterm elections. If that happens, the analyst said it could be dead in the water. But Epstein said Democrats winning Congress isn’t necessarily a headwind for the sector. Voting trends show that the most favorable outcome for defense spending would be for Democrats to take partial control of Congress. “It may seem a bit counter intuitive, but a partial ‘blue wave’ may not be such a negative for defense stocks,” Epstein said.
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