Wall Street Sees No End in Sight for Defense Stocks’ Rally
Wall Street analysts predict continued growth for defense stocks as geopolitical tensions and economic factors create long-term investment opportunities.
Editorial Team (ET)July 15, 2025
Wall Street analysts are increasingly optimistic about the continued rise in defense stocks. While geopolitical tensions typically drive short-term spikes, this latest rally appears to have deeper, long-term potential. With the Federal Reserve’s easing cycle underway and aerospace companies securing lucrative deals, the outlook for the defense sector remains strong despite elevated valuations.
Geopolitical Tensions and Defense Stock Performance
Defense stocks often surge when geopolitical tensions escalate, and the ongoing conflicts in the Middle East have been no exception. Shares of weapons and aircraft manufacturers reached record highs last week, driven by growing instability in the region. The S&P 500 Aerospace & Defense Industry Index has already surged 20% this year, its largest increase since 2019.
Top performers in the sector include Howmet Aerospace Inc., General Electric Co., and Axon Enterprise Inc. These companies, while not entirely dependent on military contracts, have benefited from the rising defense spending. Cash has also poured into the iShares US Aerospace & Defense ETF, which is on track for its biggest inflow since April.
Federal Reserve Easing and Long-Term Growth
The Federal Reserve’s current easing cycle is providing another boost for defense stocks. Historically, the sector has outperformed the broader market during such periods, often by a significant margin. Ken Herbert, an analyst at RBC Capital Markets, notes that defense stocks have exceeded the S&P 500 by an average of 23% during previous easing cycles.
The easing policies create a favorable environment for aerospace firms as well, especially with airlines renewing their fleets after pandemic-related delays. Both Boeing and Airbus are working through backlogs caused by supply chain issues, and new orders are flooding in as airline operators resume their expansion plans.
Aerospace Firms Secure Lucrative Deals
Aerospace firms like Howmet Aerospace and General Electric have capitalized on the growing demand for new commercial aircraft. With airline operators eager to replace older fleets and expand capacity, aerospace companies are seeing steady order flows. This demand is helping to insulate the sector from potential downturns related to economic slowdowns.
Although some analysts warn that rich valuations in the aerospace industry may limit upside potential, the overall demand for aircraft remains robust. David Wagner, portfolio manager at Aptus Capital Advisors, points out that the long-term prospects for the sector remain promising, even with current high valuations.
Defense Stocks: A Low-Risk Haven
One of the reasons defense stocks have become so attractive to investors is their reputation as low-risk haven assets. With defense companies split between military contracts and commercial aerospace ventures, investors are provided with a diversified portfolio that offers stability even in times of economic uncertainty.
The defense sector's ability to outperform during periods of global instability has made it a favored choice for those seeking lower volatility. In particular, the unpredictable nature of global conflicts often swings market sentiment in favor of defense stocks, further reinforcing their appeal as a relatively safe investment.
Risks to the Sector
Despite the positive outlook, there are some risks that could temper the continued rise in defense stocks. The most significant is the sector’s high valuations. The average aerospace stock in the S&P 500 trades at 28 times forward 12-month earnings, compared to 22 for the broader market. Such high valuations could cap further gains, particularly if economic conditions deteriorate or if global conflicts de-escalate.
Keith Lerner, co-chief investment officer at Truist Advisory Services, cautions that a slowdown in the economy or a reduction in tensions in the Middle East could weigh on the sector’s performance. However, any downturn is likely to be temporary given the long-term demand for defense spending.
Geopolitical Wildcards and Future Outlook
The unpredictable nature of global events remains a wildcard for defense stocks. Recent escalations in the Middle East, particularly the ongoing conflict between Israel and Iran-backed forces, have pushed stocks higher. Should tensions escalate further, it’s likely that defense stocks will continue to see gains.
On the other hand, if these tensions de-escalate in the short term, there could be some pullback in the sector. However, the overall outlook remains bullish, as global instability is unlikely to fade anytime soon. Cole Wilcox, portfolio manager at Longboard Asset Management, believes that rising demand for defense spending will persist for the foreseeable future.
Conclusion
In conclusion, the defense and aerospace sectors are experiencing a period of robust growth, driven by geopolitical tensions, the Federal Reserve’s easing policies, and increasing demand for new commercial aircraft. While high valuations may pose a risk, the long-term outlook for defense stocks remains strong as global conflicts continue to drive demand for military spending. Investors looking for stability in uncertain times are likely to find defense stocks a compelling option, with ample room for further growth.
