While much of the market is routinely whipsawed by economic data and rate cut prognostications, defense stocks just keep marching forward.
I’m talking about companies like Lockheed Martin (NYSE: LMT), General Dynamics (NYSE: GD), and RTX Corp. (NYSE: RTX) — all of which are up this year.
RTX and GD have performed especially well, having climbed 27% and 16%, respectively, outpacing an 11.5% YTD gain for the S&P 500.
Of course, it’s no secret why defense stocks are doing so well…
The world is falling apart at the seams.
Why Defense Stocks Are Soaring
The White House has been begging Israel to claim victory and sign a ceasefire with Hamas, but it doesn’t look like the IDF will be satisfied with anything less than a complete leveling of the Gaza Strip.
Indeed, Israel has set the condition for its victory impossibly high — the total annihilation of Hamas.
As one online commentator pointed out back in October, “If you eliminated Hamas but killed my whole family in the process my first move would be to start Hamas 2.”
That might not be an expert opinion, but it’s proven to be correct. The IDF may decimate the Gaza Strip, but those watching from (or fleeing to) neighboring countries have been radicalized against Israel and the United States.
For example, support for Hamas in the West Bank — the other Israeli-occupied Palestinian territory — has surged from 14% to 42%, according to one recent report by CBS.
Hamas also continues to acquire new recruits there, as well as in neighboring countries like Lebanon. And that’s just one group of extremists in a region that is positively frothing with them.
So regardless of whether or not a ceasefire is finally agreed to, the stain of violence and hatred this war has left will linger for generations to come.
Meanwhile, Russia’s invasion of Ukraine has been dragging on for 2½ years now with no end in sight.
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Russia’s Resurgence
After botching the initial invasion, retreating from a Ukrainian counteroffensive that won back significant territory, and staring down a potential coup, Russia’s war effort has regained momentum.
Vladimir Putin was able to exploit America’s domestic politics to delay badly needed ammunition and aid. That aid did eventually arrive, of course, but it might be too little, too late, as Russia has directed another offensive push towards Kharkiv — Ukraine’s second-largest city.
Fighting there has gotten so intense that President Biden recently gave Ukraine permission to strike targets inside Russia with U.S. weapons.
As with many other Ukrainian requests, the Biden administration dithered over that decision for months, if not years, before finally acquiescing, just as it did with long-range missiles, tanks, and F-16s.
No doubt, Biden could have saved a lot of lives and a lot of trouble if the U.S. just approved these things from the start. Instead, he chose to wait and see how bad things would get before rushing to suddenly reverse course.
Nevertheless, these latest developments further demonstrate the West’s resolve — or desperation, even — to keep Ukraine afloat as a bulwark against Russian aggression.
That desperation is even more acute in Europe and especially Eastern Europe. There, former Soviet satellite states and historical victims of Russian aggression are now considering sending troops to Ukraine.
The troops wouldn’t be sent to the front lines but rather would backfill positions away from the front where they’d help coordinate defenses and train Ukrainian soldiers.
The notion of sending European, even NATO forces, to Ukraine was first floated publicly by French President Emmanuel Macron. The U.S. and U.K. both dismissed the idea, but countries like Poland and Lithuania are warm to it.
Lithuanian Prime Minister Ingrida Simonyte pointed out that his country is already hosting Ukraine troops for training. So training them in Ukraine wouldn’t be such a big deal.
At the very least, the idea of sending troops to Ukraine shouldn’t be cast aside, according to Polish Foreign Minister Radoslaw Sikorski.
“We shouldn’t rule it out,” he said. “We should leave Putin guessing as to our intentions.”
Given this rhetoric, it’s entirely possible the U.S. has once agreed to dust away another of its proverbial lines as a compromise to pacify its increasingly concerned allies.
In any case, it gives Ukraine a little more breathing room.
And remember, this isn’t just “politics” or “gamesmanship.” It’s all being backed by massive military spending increases.
Defense Stocks Benefiting From Government Spending
The starting point for America’s FY25 defense budget is $895 billion and will likely hit $1 trillion in the next few years, regardless of who wins the 2024 election.
And NATO as a whole is already set to spend more than that in 2024.
In fact, a record 18 NATO members are on track to hit the alliance’s oft-stated target of 2% of GDP — up from just three in 2014. And some of those countries — those most threatened by Russia’s aggression — are exceeding it.
Poland, for example, is spending roughly 4% of its GDP on defense this year. It’s also lobbying the alliance to raise its spending guidance from 2% to 3% of GDP.
This creates another tailwind for U.S. defense giants, as foreign military sales hit a record in 2023.
And the effect of this spending has been evident in recent quarterly reports.
RTX saw a 12% increase in revenue and a 10% increase in earnings in the first quarter.
“We’re operating in one of the strongest demand periods in our history with a record $202 billion backlog and a portfolio of products and services which are fully aligned to our customers’ top priorities,” said company president and CEO Chris Calio.
General Dynamics got similar results with an 8.6% increase in revenue, a 10.4% jump in operating earnings, and a 9.1% increase in EPS.
The company ended the quarter with a total backlog of $93.7 billion, which is up 4% from a year ago.
And Lockheed Martin’s first quarter brought a 14% increase in net sales and earnings and revenue that topped analysts’ expectations.
Defense ETFs like the iShares Aerospace & Defense Fund (NYSE: ITA) and SPDR Aerospace & Defense Fund (NYSE: XAR) are up substantially, too.
I’ve also locked in triple-digit gains on AI defense partners, which you can find out about here.
Honestly, though, there’s so much money pouring into this sector right now, and so much more trouble ahead, that it’s kind of hard to go wrong.
Fight on, Jason Simpkins Simpkins is the founder and editor of Secret Stock Files, an investment service that focuses on companies with assets — tangible resources and products that can hold and appreciate in value. He covers mining companies, energy companies, defense contractors, dividend payers, commodities, staples, legacies and more… In 2023 he joined The Wealth Advisory team as a defense market analyst where he reviews and recommends new military and government opportunities that come across his radar, especially those that spin-off healthy, growing income streams. For more on Jason, check out his editor’s page. Be sure to visit our Angel Investment Research channel on YouTube and tune into Jason’s podcasts. Want to hear more from Jason? Sign up to receive emails directly from him ranging from market commentaries to opportunities that he has his eye on. 
