These defense stocks offer the best growth prospects, as the Israel-Iran conflict fuels new interest in the sector

Defense stocks, including RTX, Lockheed Martin, and L3Harris Technologies, saw gains amid escalating Israel-Iran tensions, though advances were less pronounced than after the October 7th Hamas attack; Archer Aviation, Rocket Lab, and Axon Enterprise are projected to have the highest revenue growth rates among iShares U.S. Aerospace & Defense ETF components from 2025-2027, while Boeing and Axon are considered the most expensive based on forward P/E ratios. Boeing's high P/E is attributed to depressed earnings, with significant revenue growth of 13.9% expected from 2025-2027, while Archer Aviation is expected to have sales growth of 487.9%.

Analysis

The aerospace and defense sector is experiencing heightened investor interest, primarily driven by escalating geopolitical tensions, including the recent Israel-Iran conflict and the ongoing Russia-Ukraine war, which are compelling increased defense spending globally. This has translated into share price appreciation for several key defense contractors; for instance, RTX Corp. shares advanced 1.9% (on top of a 22% year-to-date rise), Lockheed Martin Corp. rose 3%, and L3Harris Technologies Inc. gained 1% on a recent trading day marked by Israeli military operations against Iran, even as the broader Dow Jones Industrial Average declined over 500 points. The iShares U.S. Aerospace & Defense ETF (ITA) also saw a modest gain of 0.1%, reflecting sector-wide tailwinds, though these gains were less pronounced than the 4.5% surge observed after the October 7, 2023, Hamas attack. An analysis of ITA components reveals significant divergence in growth prospects and valuations. Archer Aviation Inc. (ACHR), Rocket Lab Corp. (RKLB), and Axon Enterprise Inc. (AXON) are projected to exhibit the highest compound annual revenue growth rates (CAGR) from 2025 through 2027, with Archer leading at an exceptional 487.9% (contingent on U.S. eVTOL approval), followed by Rocket Lab at 44.6% and Axon at 21.0%—notably outpacing the S&P 500's expected 5.6% revenue CAGR. However, valuations within the sector, particularly for the ITA ETF (forward P/E of 33), are relatively high compared to the S&P 500 (forward P/E of 21.6). This is partly influenced by heavily weighted constituents like Boeing Co. (BA) and Axon Enterprise Inc. (AXON), which rank as the most expensive stocks in the ETF, trading at high forward P/E ratios of 187.2 and 113, respectively. Boeing's elevated P/E reflects its current depressed earnings (consensus EPS $1.09 for next 12 months, loss in 2025), though it projects a substantial revenue CAGR of 13.9% through 2027, with earnings expected to recover to $4.00 in 2026 and $6.51 in 2027. Conversely, Boeing shares recently declined 1.7%, and GE Aerospace (GE) dropped 2.2%, following the Air India crash involving a Boeing 787 Dreamliner for which GE supplies engines, highlighting company-specific risks amid broader sector optimism. The ITA ETF itself is concentrated, with its top five holdings (GE Aerospace, RTX, Boeing, Axon Enterprise, Howmet Aerospace) constituting 54.7% of the portfolio.

Key Decisions for Investors

• Investors should acknowledge the strong tailwinds from increased global defense spending but must differentiate based on individual company growth prospects and valuations, particularly noting the high revenue CAGR forecasts for Archer Aviation, Rocket Lab, and Axon Enterprise against the S&P 500's 5.6% average.
• Carefully scrutinize the elevated forward P/E ratios within the sector, especially for Boeing (187.2) and Axon Enterprise (113), balancing Boeing's projected long-term earnings recovery and Axon's robust growth against current valuation premiums and specific operational risks, such as those recently impacting Boeing and GE Aerospace.
• Given the concentrated nature of the iShares U.S. Aerospace & Defense ETF (ITA), with 54.7% in its top five holdings, consider targeted investments in companies with compelling, distinct growth drivers, such as Archer Aviation's eVTOL prospects, as an alternative or supplement to broad ETF exposure, whilst monitoring geopolitical catalysts and company-specific news.