Best Defense Stocks To Buy Now Amid Rising Middle East Tensions
With the U.S. military on high alert and geopolitical risks escalating in the Middle East, especially following recent Iran-linked attacks, investors are turning to defense stocks for stability and potential upside.
Let’s examine how defense stocks have performed in 2025, assess the impact of recent events, and highlight potential top picks and key traits to look for when investing in the sector.
Defense Stock Performance in 2025 and Iran Impact
Overall, defense stocks are modestly up in 2025. Tension around Iran provided a short-lived boost, but it was largely priced in with mixed company-level reactions.
Standouts right now include high-growth drone/launch-tech names (AeroVironment, Rocket Lab, Joby) and opportunistic defense primes (RTX, Elbit).
Top Defense Stocks to Consider
Quality defense stocks include:
- Lockheed Martin (LMT) is a top pick for several reasons. For those interested in dividend payers, Lockheed’s 2.9% dividend yield is higher than RTX’s 2.1% or Northrop’s 1.8%, and its low growth is already reflected in its valuation, making it attractive for value investors. It’s one of the world’s best overall defense contractors.
- RTX Corporation (RTX) and Northrop Grumman (NOC) are also strong contenders. Northrop Grumman offers a 1.8% dividend yield and has been a reliable dividend growth stock, paying dividends for 35 consecutive years and increasing its payout for 21 straight years.
- Axon Enterprise (AXON) is a newer category of defense technology, providing technology solutions such as less-lethal weapons (e.g., tasers), as well as body cameras and cloud-based software.
What Investors Should Look for in a Defense Stock
Defense remains one of the most secretive yet forward-looking sectors, so understanding this space means staying alert to subtle signals and long-lead developments.
Contract Exposure
- Prioritize firms with large, multi-year government contracts and strong backlogs (e.g., Lockheed Martin, Northrop Grumman).
- Participation in next-generation programs like NGAD (Next Generation Air Dominance), missile systems, and autonomous drones signals long-term revenue visibility.
- Consider firms with international defense contracts as well. Foreign military sales can diversify revenue and insulate against shifts in US budget priorities.
Geopolitical Sensitivity
- Stocks tied to active hotspots, such as Ukraine, the Middle East, or the Taiwan Strait, may show short-term volatility but benefit from increased spending.
- Escalations involving Iran, Israel, or NATO have triggered recent stock moves in companies like RTX and Elbit Systems.
Diversified Product Mix
- A broad defense portfolio (e.g., missiles, satellites, cybersecurity, drones, naval systems) reduces reliance on any single program like the F‑35.
- Companies like RTX and General Dynamics benefit from exposure across air, land, sea, and space domains.
Valuation Metrics
- Focus on stocks with reasonable forward P/E ratios.
- Lockheed Martin and Northrop Grumman currently trade near 17x earnings, offering a balance of value and stability.
Be cautious of overvalued defense names with speculative growth and weak earnings. You may end up with a lot of volatility for uncertain future cash flow.
Dividend Reliability
- Look for companies with long dividend histories and consistent payout growth.
- Northrop Grumman, for example, has a 35-year record of uninterrupted dividend payments, a sign of financial health and shareholder alignment.
Government Spending Trends
- The fiscal 2025 US defense budget is set at $923.3 billion, up 4.1% from 2024, per the National Defense Authorization Act.
- Rising global tensions and modernization needs support multi-year investment flows into defense sectors.
Risk Factors
- Consider cybersecurity exposure, as defense contractors are high-value targets (e.g., Iranian-linked attacks).
- Also weigh R&D cost efficiency, margin stability, and dependence on Congressional appropriations.
- As mentioned above, many defense projects, and especially emerging technologies, are developed in secret. Accordingly, be mindful that from the outside investors have limited visibility with respect to a lot of what a company does.
ETF and Fund Exposure
- Aerospace and defense ETFs like ITA (iShares US Aerospace & Defense) or XAR (SPDR S&P Aerospace & Defense) can provide diversified, lower-risk exposure. They’ve benefited from renewed investor interest and defense budget tailwinds in 2025.
Diversification and Specialization
- Companies that combine wide-ranging capabilities with innovation in specialized fields (like unmanned systems or hypersonics) can capitalize on multiple fronts.
- AeroVironment (tactical drones) and Rocket Lab (military LEO launches) show how specialization can drive growth alongside traditional primes.
Balancing steady cash flow, geopolitical resilience, and exposure to high-tech defense trends is key in a higher-alert global environment.
This article is for informational purposes only and does not constitute investment advice, a recommendation, or an offer to buy or sell any security. Investing in defense stocks involves risks, including geopolitical volatility and market fluctuations. Always conduct your own research or consult a licensed financial advisor before making investment decisions. Past performance is not indicative of future results.