Defense Stocks Decline Despite Ongoing Iran War

Investors unwind positions after early surge, signaling conflict premium has peaked

Apr. 2, 2026 at 4:44pm

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U.S. defense stocks have declined even as the Iran war drags on, indicating that the typical 'buy-on-conflict' trade had largely peaked in the weeks before in anticipation of tougher action by President Donald Trump. The NYSE Arca Defense index fell nearly 8% in March, compared with the broader S&P 500's 5% drop, as investors unwound positions after a strong run this year.

Why it matters

The sluggish performance of defense stocks signals that investors believe the conflict premium has already been priced in, despite ongoing military operations. This suggests uncertainty around the long-term impact on defense spending and production capacity constraints that limit how quickly output can ramp up to meet demand.

The details

Analysts say a lot of the conflict premium was already baked into defense stock valuations before the war began, as the Trump administration signaled it was preparing for a confrontation with Iran. The European defense sector also fell 11% in March amid broader market selloffs. While Trump has proposed a $1.5 trillion U.S. military budget for 2027, there is uncertainty if Congress will approve such a large increase. Production challenges and pressure from the Trump administration to prioritize operations over shareholder returns are also weighing on the sector.

  • The NYSE Arca Defense index fell nearly 8% in March 2026.
  • The index had gained about 12% in February 2022 when Russia invaded Ukraine.

The players

David Bianco

Americas chief investment officer at German asset manager DWS.

Douglas Harned

Bernstein analyst.

Sameer Samana

Head of global equities at Wells Fargo Investment Institute.

Richard Safran

Senior analyst and managing director of aerospace and defense at Seaport Research Partners.

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What they’re saying

“A lot of conflict premium was in their valuations.”

— David Bianco, Americas chief investment officer at German asset manager DWS

“Nothing that has happened so far suggests that a $1.5 trillion 2027 defense budget could be exceeded. For these reasons, one should not expect upside to come from the current conflict.”

— Douglas Harned, Bernstein analyst

What’s next

Key spending details for the U.S. defense budget are expected to be announced on April 21, 2026, which will provide more clarity on future defense spending.

The takeaway

The decline in defense stocks despite the ongoing Iran war suggests investors believe the conflict premium has already been priced in, raising questions about the long-term impact on defense spending and production capacity constraints.