While the S&P 500 is basically flat this year and tech stocks are getting smacked around, one sector has been quietly running circles around the market: defence.
The Morningstar Global Aerospace and Defense Index is up 11.7% year-to-date. The broader global stock market? Up 0.4%. That’s not a gap — that’s a canyon. And the Iran conflict is only making it wider.
Here’s what’s driving the move. Europe is scrambling to rearm after decades of letting the U.S. foot the bill. Germany alone is adding over €60 billion to its annual defence budget by 2029. Asia isn’t sitting still either — China, Japan, and South Korea are all expanding military spending as regional tensions heat up. This isn’t a trade — it’s a structural shift in global spending priorities.
The numbers show it. Rolls Royce just posted a 14% revenue jump and a 38% surge in operating profit, driven by “sustained demand across transport, combat, and submarine programmes.” Lockheed Martin’s P/E ratio has ballooned from 14 in late 2023 to over 30 today. Investors are paying up because they believe these tailwinds are permanent.
And there’s the portfolio protection angle that makes defence particularly interesting right now. During the week ending March 6 — when global stocks dropped 3.7% — defence fell only 1.4%. In a market rattled by geopolitical shocks, oil price spikes, and recession fears, that kind of relative stability is worth its weight in gold.
The risk? Valuations are getting stretched. If a recession forces European governments to redirect military budgets toward social spending, the tailwind could reverse. And if the Iran and Ukraine conflicts resolve quickly, some of the urgency premium evaporates.
But here’s the counterargument: even if peace breaks out tomorrow, the world has been reminded that the rules-based order can’t be taken for granted. Nations that let their military capabilities atrophy are scrambling to rebuild them. That kind of institutional commitment doesn’t unwind overnight. For investors looking for a sector with real earnings growth, government-backed demand, and portfolio diversification in a volatile world, defence deserves a hard look.