Defense stocks drop 20% as Iran peace deal shifts sector outlook

Defense stocks have lost more than 20% since the Iran conflict erupted in late February, but the weekend peace deal between the U.S. and Iran is expected to drive a sector rebound as investors reassess the outlook for military spending.

"The reopening of Hormuz is a relief valve, not a full peace dividend," said Stephen Innes, managing partner at SPI Asset Management. "The market can remove some crude panic, but it still has to price the gap between a headline, a signature, and a regime that actually complies."

Major defense contractors have fallen into bear market territory since fighting broke out in late February, with many stocks declining more than 20% from their pre-conflict highs. The prolonged hostilities created supply chain disruptions and cost overruns that weighed on earnings expectations across the sector.

The peace deal, announced Sunday by President Donald Trump on Truth Social, calls for a signing ceremony Friday in Switzerland. The agreement includes reopening the Strait of Hormuz, a critical shipping route that had been effectively closed since the conflict began, squeezing global oil supplies and pushing U.S. inflation to a three-year high of 4.2% in May.

A Nuanced Recovery Path

For defense contractors, the calculus is nuanced. While peace typically reduces the urgency for military procurement, a resolution removes the uncertainty that had been depressing valuations. The sector had been pricing in a prolonged conflict, and any de-escalation forces a repricing of risk.

"The end of hostilities removes a major overhang for defense stocks," said Takashi Hiroki, chief strategist at Monex.

The broader market reaction has been overwhelmingly positive. S&P 500 futures climbed 1.3% Sunday evening, while Nasdaq 100 futures gained 1.3% and Russell 2000 futures rose even more. The rally extended to Asia on Monday, where Japan's Nikkei 225 surged 5% to a record 69,317.50 and South Korea's Kospi jumped 5.2% to 8,545.98. Hong Kong's Hang Seng added 0.5% to 24,842.67, while the Shanghai Composite rose 1.6% to 4,096.47.

Oil Plunge Eases Inflation Pressure

Brent crude fell $4.28 to $83.05 a barrel, its lowest since the opening days of the war, while West Texas Intermediate lost $4.55 to $80.33. The drop in energy prices provides a tailwind for the broader equity market by easing inflationary pressures and potentially giving the Federal Reserve more room to consider rate cuts.

The Fed is widely expected to hold rates steady at its meeting Wednesday, but the sharp decline in oil prices could shift the forward guidance. The Bank of Japan is expected to raise its benchmark rate to 1% on Tuesday, its highest in more than 30 years.

For defense investors, the key question is whether the peace deal holds. If the signing proceeds as scheduled Friday in Switzerland, the sector could see a rapid recovery as investors rotate back into beaten-down names. If negotiations falter, the bear market could deepen.

This article is for informational purposes only and does not constitute investment advice.