While most of the stock market stumbled on Monday, one sector had its best day in months. Defense stocks surged across the globe as the U.S.-Iran conflict escalated into its third day, with major contractors hitting fresh record highs and analysts scrambling to raise price targets.
Northrop Grumman led the pack stateside, closing up 6%. RTX Corp (the parent of Raytheon, Collins Aerospace, and Pratt & Whitney) gained 4.7%. L3Harris rose 3.8%, Lockheed Martin added 3.3%, and even Boeing — which has its own well-documented headaches — managed a 2% gain. The iShares U.S. Aerospace & Defense ETF (ITA) tested all-time highs during the session.
In Europe, the rally was even more pronounced. BAE Systems jumped 6%, Germany’s Hensoldt surged nearly 5%, Italy’s Leonardo gained over 2%, and Renk climbed more than 3%. The pan-European Stoxx 600 fell 1.8% on the day — defense was the lone sector in the green. In Asia, Japan’s Mitsubishi Heavy Industries and IHI each rose roughly 3%, while Singapore’s ST Engineering climbed nearly 3%.
The trigger was the dramatic escalation over the weekend. U.S. and Israeli strikes killed Iranian Supreme Leader Ayatollah Ali Khamenei, ending his 36-year rule. Iran retaliated with strikes on U.S. bases that killed three American service members. President Trump warned of further casualties and said the conflict could last up to four weeks.
But here is what makes the defense trade interesting beyond the obvious headline reaction: these stocks were already on a multi-year tear before a single missile flew at Iran. European governments have been hiking defense budgets since Russia’s invasion of Ukraine. NATO spending commitments have been rising. Germany’s massive rearmament program has been a boon for the entire sector. The Iran conflict is gasoline on an already-burning fire.
Not everyone is chasing the rally blindly, though. Barclays analysts published a note Monday saying there have been more negatives than positives in this quarter’s defense earnings season. Sweden’s Saab posted record results, but Barclays questioned the sustainability of its elevated growth and warned that valuations are at a significant premium. Saab shares spiked 7% early Monday before quickly giving back all gains to close flat.
That valuation concern is worth paying attention to. MarketWatch screened the largest U.S. defense contractors and found that while forward P/E ratios look stretched after the recent run-up, several names — including Boeing — still trade at low price-to-sales ratios compared to the S&P 500. For investors looking at the sector, sales-based metrics may be more useful than earnings-based ones, especially for companies in heavy investment cycles.
Franklin Templeton analysts recommended favoring energy, shipping, insurance, and defense in the near term while remaining cautious on fuel-sensitive cyclicals like airlines. Carl Bildt, former Swedish Prime Minister, noted that Iran’s strikes on targets across the Gulf — beyond just U.S. military facilities — were surprising and highly disturbing for regional stability.
The question investors need to answer is whether this is a trade or a trend. If the conflict wraps up in Trump’s stated four-week window, the knee-jerk premium probably fades. But if it drags on — or worse, expands — defense stocks could have considerably more runway. Either way, the sector has proven once again that when the world gets dangerous, the companies that build the weapons tend to do just fine.