Are defense stocks missing out on war-driven gains? Bernstein explains

Investing.com -- The U.S.-Iran war has entered its second month, but defense stocks have failed to capitalize on what investors might expect from an active military conflict, and Bernstein analysts say that may not change anytime soon.

In a Tuesday note to investors, analysts led by Douglas Harned pushed back on the conventional assumption that war is automatically good for defense shares. Outperformance, they said, "requires that geopolitical threats translate to higher levels of defense spending" — and on that front, the current conflict offers limited ammunition.

Defense stocks have retreated roughly in line with the broader market since the war began, while commercial aerospace names have fared even worse, falling 10% to 20%.

The one clear bright spot for defense is missile restocking. Large numbers of Tomahawks, tactical missiles, and interceptors have been consumed in strikes on Iran, with Tomahawk usage alone now estimated at roughly 850 — the largest in history.

That dynamic primarily benefits RTX (NYSE: RTX), Lockheed Martin (NYSE: LMT), L3Harris (NYSE: LHX), and Northrop Grumman (NYSE: NOC). US missile usage has since fallen sharply, as attacks have shifted to cheaper gravity bombs now that Iranian air defenses have been largely destroyed, but "substantial restocking" is still required, pushing "production rates higher for longer," the analysts said.

The main uncertainty, they emphasized, is how long those production ramps will need to extend, particularly given that key suppliers were already ramping rapidly before the war began.

More broadly, Bernstein argued that a successful outcome could actually reduce the need for future spending. "If the war is successful in removing Iran as a threat, the needs for spending could actually decline in both the U.S. and the Middle East," the analysts wrote.

The Trump administration had already signaled ambitions for a $1.5 trillion defense budget in 2027, but analysts believe the market is currently pricing in something closer to $1.1 to $1.2 trillion.

"One should not expect upside to come from the current conflict," they said, unless ground troops are deployed, other powers become more directly involved, or a new theater such as China-Taiwan opens.

As for commercial aerospace, Bernstein sees little fundamental risk to Airbus and Boeing, given that new aircraft demand far outpaces supply through the rest of the decade. The more vulnerable names are engine OEMs and MRO providers — GE Aerospace, Safran, Rolls-Royce, MTU, and StandardAero — which have each fallen more than 15% since the war began.

Jet fuel globally has more than doubled versus 2025 levels, and if high prices persist alongside economic weakness, airlines could park older aircraft and defer shop visits, pressuring aftermarket revenues.

Bernstein noted, however, that an unusually large backlog of shop work provides a buffer, likely pushing any meaningful impact out by at least nine months.

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