Defense Stocks Are Having Their Best Quarter in a Decade — Is There Still Upside?
When the Iran conflict escalated in February 2026, defense stocks did exactly what anyone with a basic understanding of markets would expect: they ripped higher. Lockheed Martin (LMT) is up 35% from its pre-conflict lows. Raytheon (RTX) has gained 28%. Northrop Grumman (NOC) surged 32%. General Dynamics (GD) added 24%. The question every trader is asking: did I miss it, or is this the beginning of a multi-year defense spending super-cycle?
The answer requires separating the initial panic buying (which is largely done) from the structural shift in defense budgets (which is just getting started). Both matter for how you position.
The Fundamental Case: Defense Budgets Are About to Explode
Before Iran, the US defense budget was $886 billion for FY2025. The supplemental spending bill currently moving through Congress adds $45 billion specifically for Middle East operations. But the bigger story is FY2026 — the preliminary budget request leaked last week shows $950 billion, a 7.2% increase that dwarfs the typical 3-4% annual growth.
Europe is even more dramatic. NATO members that were dragging their feet on the 2% GDP defense spending target are now racing past it. Germany announced 2.5% GDP for defense. Poland is at 4%. The UK committed to 2.5% by 2027, accelerated from 2030. This is not temporary. These are structural budget commitments that will flow to defense contractors for the next 5-10 years.
Backlog Data — The Most Important Metric: LMT's backlog stands at $166 billion — an all-time record. RTX's backlog is $202 billion. NOC sits at $84 billion. These backlogs represent years of guaranteed revenue. When you see backlogs at record levels AND budgets increasing, the earnings revisions have barely begun.
Technical Analysis: Where Each Name Stands
Lockheed Martin (LMT) — $585: LMT broke out of a two-year range between $420-$500 and has not looked back. The stock is extended — it is trading 18% above its 50-day moving average, which historically leads to a 5-8% pullback before resumption. Key support at $545 (the breakout level that should now act as a floor). Resistance is thin above — the all-time high at $603 from 2022 is the next target. A pullback to $545-$555 is a high-conviction entry zone.
Raytheon (RTX) — $128: RTX has the cleanest chart of the group. It broke above $115 resistance on massive volume and has consolidated between $124-$132 for two weeks. That consolidation is bullish — it means buyers are absorbing supply without giving back gains. A break above $132 targets $145. Support at $120, with the 21-day EMA at $122 as the trend guide. RTX also has the best dividend in the group at 2.1%, which matters for institutional flows.
Northrop Grumman (NOC) — $545: NOC is the pure-play on advanced systems — the B-21 bomber, missile defense, and space. It has gained the most but is also the most volatile. The stock gapped up through $500 and has not filled that gap. Unfilled gaps often act as magnets on pullbacks. If NOC pulls back to $500-$510, that is the entry. Above $550, the next target is $580.
General Dynamics (GD) — $310: GD is the diversified play — Gulfstream jets, combat vehicles, IT services, and submarines. It has lagged the group because Gulfstream demand is macro-sensitive and recession fears are growing. But the combat systems and submarine backlog tell a different story. GD at $295-$300 on a pullback is the value entry in the defense sector.
Options Strategies for Defense Stocks
The Pullback Entry — Cash-Secured Put on LMT: If you want to own LMT at a discount, selling the April 18 $545 put collects roughly $8.50 in premium. If LMT stays above $545, you keep $850 per contract — a 1.6% return in 5 weeks. If LMT pulls back and you get assigned, your effective entry is $536.50, which is 8.3% below the current price and right at major support. This is the professional way to buy pullbacks.
The Momentum Play — Call Debit Spread on RTX: RTX's consolidation pattern suggests a breakout is coming. The April $130/$140 call spread costs approximately $3.80. Max profit is $6.20 if RTX is above $140 at expiration — a 163% return on the debit. The defined risk means your maximum loss is the $380 per contract you paid. This is the play if you believe the consolidation resolves higher.
The Pairs Trade — Long NOC / Short GD: If you want defense exposure without broad market risk, going long NOC and short GD in equal dollar amounts isolates the "pure defense" factor. NOC benefits more from conflict escalation (missile defense, bombers), while GD's Gulfstream exposure creates drag if the economy weakens. This spread has widened from 0.8x to 1.1x since the conflict began and could reach 1.3x if tensions persist.
The Covered Strangle on RTX: For shareholders, selling a covered call at $140 and a cash-secured put at $118 on RTX creates income while you hold. You collect roughly $5.00 total in premium on the April cycle. Your stock gets called away above $140 (acceptable — you lock in gains), and you add shares at $118 if it tanks (acceptable — that is a great entry). Meanwhile, you pocket the $500 per 100 shares in premium regardless.
Sector ETFs: ITA and XAR
If individual stock selection is not your style, the iShares U.S. Aerospace & Defense ETF (ITA) and the SPDR S&P Aerospace & Defense ETF (XAR) offer diversified exposure. ITA is more top-heavy (LMT and RTX are 18% of the fund combined), while XAR is equal-weighted, giving more exposure to mid-cap defense names like L3Harris (LHX) and Curtiss-Wright (CW).
ITA options are liquid enough for spread strategies. The April $140/$150 call spread on ITA costs roughly $3.50 with a max payout of $6.50 — similar risk/reward to the individual name plays but with diversification built in.
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The Bear Case You Need to Hear
Defense stocks are priced for continued escalation. If a ceasefire materializes — even a temporary one — these names could give back 10-15% in days. The RSI on LMT is 72 (overbought territory). Short interest across the sector is at 5-year lows, meaning there is no short-covering fuel left to drive prices higher.
The other risk is margin compression. Defense contracts are often fixed-price, and inflation has increased input costs. Raytheon flagged this on their last earnings call — margins on legacy programs are under pressure even as revenue grows. Revenue growth without margin expansion means PE multiples could compress.
Position accordingly. Use defined-risk structures. Take profits on 30-50% of your position at resistance levels. And maintain the discipline to add on pullbacks rather than chasing extended moves. The defense cycle is real, but the easy money has been made. The smart money is being made on entries, not chases.
