Right now security stocks in the US are entering the shelter. These are the explanations

As the war drags on, it is depleting the US missile inventory. The first four days alone of the attacks in Iran reportedly cost almost 11 billion dollars, of which about 5.7 billion were for Iranian missile interceptors and UAVs. These include the Patriot and Thaad systems, which along with missiles and other munitions are the bread and butter of the security companies. The inventory reduction is so severe that the US may transfer air defense assets from South Korea to the area.

Despite this, in the shares of the five largest defense industry companies – Lockheed Martin , Northrop Grumman , General Dynamics , Boeing and-RTX – There has actually been a moderate decrease of about 1% on average since the outbreak of the Iran war.

One of the reasons for this is that their prices have already embodied expectations for significant growth. Markets have been bullish on gun makers since election sentiment swung in favor of Donald Trump. Since the June 2024 election showdown against former President Joe Biden, the five largest defense companies have risen about 50% on average. Four of them trade on average at a predicted earnings multiple of about 26, close to their historical highs.

Investors had many reasons to turn to security stocks. Long before the Iran war, Pentagon officials were troubled by the state of the US weapons stockpile and urged arms manufacturers to increase the pace of missile production, as reported by the Wall Street Journal. Earlier this year, the Pentagon signed multi-year agreements with leading defense companies to increase weapons production. Large orders for missile renewal should benefit all major defense companies, but especially RTX, which is mainly involved in missile production.

Budgets are growing, though

The conflicts that multiplied in the world raised the security budgets everywhere. The U.S.’s for the current fiscal year is at a record $1 trillion; European NATO members have raised their military spending targets to 5 percent of GDP. About half of that spending typically flows to American companies, notes Sheila Khaioglu, an equity analyst at Jefferies. Japan, South Korea and India also raised their military spending targets. Trump has even bigger spending ambitions in January. He called for a defense budget of 1.5 trillion dollars for the fiscal year 2027, based on revenue from tariffs, but the Supreme Court has since canceled them. The administration usually sends out a budget request for the next fiscal year in February, but this year that hasn’t happened yet, says Jerry McGinn, head of the industrial base at the CSIS Institute.

But the defense companies are not guaranteed an overwhelming victory this time. Even before the current conflict, the Trump administration has shown interest in new and more flexible defense technologies. As part of the extended US budget for 2026, spending on legacy programs remained flat, while the budget for more innovative technologies such as those related to space, AI and UAVs grew by more than 20%, according to RBC Capital analyst Ken Herbert. “The idea is to bring in more new players, and more commercial solutions,” explained Jerry McGinn, head of industry at the CSIS Institute. Security technology has been at the center of attention for several US presidential administrations, although the matter has intensified in Trump’s second term.

A chance to get smaller

The Iran war may tip the scales even further in favor of defense technology companies, as it highlighted how expensive the armament strategy of the US and its allies in the Gulf is. They use missiles and fighter jets worth millions of dollars to intercept Iran’s drones, which cost only tens of thousands of dollars. It has been reported that the US and its allies are looking at more economical options. And while the leading defense companies do have exposure to newer technologies, most of their revenue comes from legacy programs, RBC’s Herbert said.

This may be one of the reasons for the preferred performance in the stocks of smaller defense technology companies. Over the past 12 months, shares in the equal-weight State Street SPDR S&P Aerospace & Defense index fund, which has greater exposure to smaller defense technology companies, have risen 67%, while shares in the iShares US Aerospace & Defense ETF, which has greater exposure to the leading companies, have risen 54%.

Investors are also concerned about the Trump administration’s close supervision of the financial expenditures of the major defense companies, under which they are prohibited from paying dividends or buying their shares until “they are able to produce an excellent product, on time and within the defined budget.” This may have an impact on the earnings per share of the companies, at least in the near term.

There are other risks that could arise if fighting in the Middle East continues. First, if the war proves unpopular to the point of losing to the Democrats, it could put pressure on the defense budget. Another risk lies in the possibility that the government will invoke the Defense Production Act, an authority it has already threatened to use against Anthropic, to mandate the production of weapons systems.

So the increasing conflicts around the world do not necessarily create a safe market environment for arms manufacturers.