3 Defense Stocks to Watch as War Drags On, Spending Set to Surge

82nd Airborne troop deployments and mixed U.S.-Iran diplomacy keep the Middle East conflict active while the U.S. is expected to push a sharply higher defense budget (Trump previously proposed a $1.5 trillion plan), reinforcing demand for defense suppliers. Lockheed backlog was $193.6B and RTX defense backlog about $107B at end-2025; Boeing’s defense backlog was roughly $85B, supporting multi-year revenue visibility. RTX is Zacks #2 with consensus EPS revisions up $0.15 (2026) and $0.18 (2027); Lockheed is Zacks #3 with 2026 EPS moved up $0.12 to $28.93 (implying ~30% YoY growth); Boeing is Zacks #3 with large year-over-year EPS jumps implied for 2026–27. For portfolio positioning, these dynamics are sector-positive and favor companies with large backlogs, diversified portfolios and strong free cash flow, but geopolitical uncertainty warrants maintaining defensive sizing.

Analysis

The current mix of headline-driven de‑escalation and precautionary military posture points to a sustained, multi‑year lift in procurement and sustainment budgets rather than a single, short‑lived spending spike. That favors primes with high free‑cash generation and balanced government/commercial exposure because they can convert long backlogs into predictable cashflow while funding capacity expansion; conversely, companies with heavy commercial cyclicality are more exposed to execution and demand shocks if macro sentiment sours.

Second‑order winners will be suppliers of precision munitions, sustainment/MRO providers, and specialized component makers whose constrained capacity gives pricing leverage; these suppliers are logical consolidation targets and could see margin expansion before prime contractors fully price services into new awards. Semiconductor and sensor vendors embedded in guided systems will see a 12–24 month lead time to meaningful revenue inflection — watch content per weapon rather than unit counts to forecast earnings flow.

Key risks are asymmetric: rapid regional escalation or sanctions that disrupt global supply chains could push defense budgets into emergency accelerated delivery (beneficial to some primes) but also create input cost spikes and export restrictions that compress margins. Political and budgetary friction in the U.S. (appropriations, sequestration fights) is the highest‑probability near‑term reversal — expect headline volatility in days–weeks and program funding realizations on a months–years cadence.

Practically, this is a higher‑conviction, multi‑quarter theme with tactical intraday noise. Position sizing should reflect two horizon buckets: 1) headline alpha trades (short‑dated options, pairs to neutralize market beta) and 2) structural exposure (stock/call spreads) to capture backlog conversion, capacity adds, and likely M&A among suppliers over 12–36 months.

Key Decisions for Investors

• Long RTX (buy shares or buy 12‑18 month call spreads): target +20–30% return if defense budgets are passed and backlog conversion accelerates; cap downside with a 15% stop or sell a 6‑9 month OTM call to finance premium. Size as core structural exposure (5–8% net long equity sleeve).
• Pair trade — long LMT / short BA (equal dollar notional) for 3–9 months to isolate pure defense sustainment/platform exposure vs commercial execution risk: expect positive carry if defense spend materializes; risk if Boeing outperforms on a commercial recovery headline — cap pair at 3% portfolio and reassess on monthly cadence.
• Tactical options hedge: buy 1–3 month puts on BA and short‑dated straddles around major geopolitical headlines to monetize expected volatility spikes; use proceeds to fund long calls on LMT or RTX. This targets asymmetric event risk (days–weeks) while keeping structural longs intact.
• Small tactical overweight NDAQ (6–12 months) as a volatility/liquidity beneficiary: increased trading and hedging flows from sustained geopolitical uncertainty should lift exchange volumes and derivatives revenue. Target +10–15% upside; keep exposure modest (2–3% portfolio) and hedge with index puts if macro risk rises.