While the broader market melts down — the S&P 500 officially entered correction territory this week — one sector is quietly doing its job. Defence stocks are up 11.7% year-to-date while global equities are basically flat. During the worst week of selling since 2022, the Morningstar Global Aerospace and Defense Index fell just 1.43%, compared to a 3.7% drop in the MSCI ACWI. That is what portfolio protection looks like in practice.
The catalyst is obvious: the U.S.-Israel bombing campaign against Iran has pushed geopolitical risk to levels not seen in decades. The VIX spiked above 35 earlier this week — nearly double its pre-conflict level. Brent crude is at $120. In that environment, investors are scrambling for sectors that actually benefit from elevated global tension, and defence is the one place where the news flow works in your favor rather than against it.
But the real story is not just the Iran conflict. The structural tailwinds for defence spending were already in place before a single missile was fired. Germany committed to increasing its annual defence budget by more than €60 billion by 2029. NATO allies across Europe are racing to meet Trump-era spending mandates from a historically low base. In Asia, military budgets in Korea, Japan, and China are all expanding as tensions simmer across multiple flashpoints.
The numbers back it up. Rolls Royce reported a 14% revenue increase and a 38% jump in underlying operating profit in its latest results, driven by sustained demand across transport, combat, and submarine programs. Lockheed Martin price-to-earnings ratio has more than doubled from roughly 14 in September 2023 to over 30 today — a sign the market is pricing in years of elevated earnings, not just a short-term war premium.
Aneeka Gupta, director of macroeconomic research at WisdomTree, put it bluntly: “Europe is building from a much lower base” after decades of underinvestment. Even if the Iran conflict and Ukraine war resolve tomorrow, the consensus view is that higher defence spending is now a permanent structural shift. The rules-based order that kept the world relatively peaceful for decades can no longer be relied upon — and governments are writing checks accordingly.
The risk? Valuations are rich. If a global recession forces European governments to redirect funds toward social spending and away from military budgets, the premium could evaporate quickly. But for now, in a market where almost nothing is working, defence stocks are the closest thing to a safe haven that still has growth built in. ETFs like VanEck Defense (DFNG) and WisdomTree Europe Defence (WDEP) offer broad exposure without single-stock risk.