Defense Stocks Surge as Middle East Conflict Escalates

The recent escalation of the Middle East conflict, particularly the Israel-Hamas war, is having a significant impact on defense contractors’ stocks. Investors are closely monitoring the situation and assessing potential winners and losers in this volatile market. As tensions rise, defense stocks are experiencing a surge, with Lockheed Martin and Northrop Grumman leading the way.

Lockheed Martin (LMT) and Northrop Grumman (NOC) shares have seen a premarket trading increase of 4.9% and 4.3% respectively. Other major defense contractors, including General Dynamics (GD), L3Harris Technologies (LHX), and Huntington Ingalls Industries (HII), have also witnessed notable gains of 3.2%, 3.2%, and 1.6% respectively. RTX shares (RTX) have surged by 4%.

However, Boeing (BA) shares remain flat amidst this surge. Smaller defense stocks such as Kratos Defense and Security Solutions (KTOS) and BWX Technologies (BWXT) have experienced mixed results, with gains of 3% and 0.7% respectively. Mercury Systems (MRCY) shares, on the other hand, have declined by 1.8%.

The collective market capitalization of these defense stocks has risen by $15 billion, reaching approximately $500 billion. While investors seek guidance on the conflict’s duration and potential expansion, few on Wall Street have provided insights thus far. A shorter and contained conflict may lead to a reversal of gains in defense shares.

Apart from the Middle East conflict, investors are also considering the potential impact of a U.S. government shutdown on the defense sector. Historically, such shutdowns have had minimal effects on defense stocks. However, it is worth noting that defense shares, excluding Boeing, have not been strong performers in recent times. Only Boeing shares have shown growth over the past 12 months, primarily due to its commercial aerospace business. The average movement for other large-cap defense stocks has been a decline of approximately 14% over the same period, while the S&P 500 has risen by about 19%.

Consequently, defense stocks, excluding Boeing, are currently trading at around 14.5 times estimated 2024 earnings, down from the historical average of 17 times in recent years. Boeing’s earnings continue to be impacted by the ongoing effects of the Covid-19 pandemic and the 737 MAX issues, resulting in the stock trading at approximately 38 times estimated 2024 earnings.

In conclusion, the Middle East conflict has triggered a surge in defense stocks as investors anticipate potential outcomes and implications. While the situation remains uncertain, defense contractors are experiencing notable gains, highlighting the market’s response to geopolitical events.