By Jacob Sonenshine

Defense stocks have had a wild ride, but now they're worth a look.

The iShares U.S. Aerospace & Defense ETF -- home to aerospace and defense manufacturers such as GE Aerospace, Lockheed Martin, Northrop Grumman, and RTX -- rallied 23% from a December low to a $250 record in early March. The Iran war had flared up, and investors wondered whether the U.S. government would spend more on defense than previously anticipated.

Then came the profit-taking.

The ETF dropped 16% from that March peak to a low of $210. Signs of a resolution in the Middle East have emerged but analysts' sales and profit estimates have barely changed all year, meaning the war itself isn't a game-changer.

Now, the fund is up to $217, boosted Monday by negative headlines about Iran. It's still well below its record high, but also stabilizing above the low.

"There's a potential big base here," writes John Roque, 22V Research's head of technical strategy, meaning the price may have found a baseline where buyers are coming in to support the stocks, sending them higher.

On the negative side, the ETF is seeing resistance, or selling pressure, at $231. It recently rallied to that number, and then promptly dropped.

At this point, investors should look at when to buy some of these stocks, or the ETF outright. If it continues to see support above $210, it could be time to buy a few shares.

Don't buy too many. If the $210 does not hold, the next level of clear support is around $198, where buyers swooped in to send the ETF higher in late November. That could present an even better buying opportunity.

This technical picture is consistent with the fact that the stocks remain fairly expensive, so waiting for cheaper prices before buying a lot of shares is smart. The ETF trades at 34 times analysts' aggregate expected earnings for the coming 12 months, a 61% premium to the S&P 500's just over 21 times.

Yes, defense stocks deserve a premium, given their stable growth outlooks, but they're likely not quite worth the current multiple. In the past five years, the fund has averaged a 32% premium to the S&P 500's price/earnings multiple, according to our calculations of FactSet data.

So invest prudently, but also remember that the long-term outlook for these companies is strong.

Today, U.S. military spending is set to rise about 6.5% annually to $1.37 trillion through 2031, according to government websites. While it's difficult to say whether the growth will last beyond that period -- the market will weigh the possibility of slower spending should Democrats gain traction in the congressional elections -- right now the market must assume some ongoing growth. U.S. allies such as the United Kingdom are also expected to increase spending.

"'Blue Wave' or not, we continue to believe that the defense stocks in our coverage that are well-aligned with bipartisan budget priorities can sustain elevated revenue growth rates for some time," write Citi analysts.

That's why analysts for companies in the defense ETF expect aggregate sales to grow 8% over the coming three years, according to FactSet. Remember, the major manufacturers all have foreign customers, though the largest chunk of their revenue comes from the U.S. government.

They also have after market businesses, which service customers' existing products for repair and other needs. It's a stable business in theory, as customers need the services to fix or replace parts. Deloitte expects low single digit annual growth for the after market.

The resulting total sales growth should nudge profit margins higher. Sure, these companies will have to spend a bit more on heavy equipment to meet the demand, but that spending will not necessarily come faster than revenue growth, so expenses may not grow as fast as revenue.

This is partly why analysts forecast aggregate earnings for the fund to grow 17% annually over the coming three years -- a touch higher than the S&P 500's profit growth.

So the stocks could gain over the coming few years, but with some stops and starts. If military spending meets or beats the market's expectations, the market might assume more aggressive growth and bid the stocks higher. A slight disappointment could cause the stocks to finally drop back to that cheaper level a bit below $200. The solution for an investor: buy a little now, but reserve some cash in case the stocks become cheaper.

And then load up on them.

Write to Jacob Sonenshine at jacob.sonenshine@barrons.com

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May 04, 2026 13:39 ET (17:39 GMT)

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