Defense Contractors: Riding Geopolitical Winds Amid Activist Headwinds

The global defense sector is caught in a paradox: surging demand from geopolitical tensions collides with escalating activism and regulatory scrutiny. Investors must weigh the tailwinds of military spending against the risks of operational disruptions, compliance costs, and reputational damage. This article evaluates how major defense contractors like Lockheed Martin (LMT), Raytheon Technologies (RTX), and L3Harris (LHX) are positioned amid these conflicting forces—and where investors should place their bets.

Geopolitical Tailwinds: A Boon for Defense Giants

The Russia-Ukraine war has supercharged global defense spending. NATO members have pledged to raise defense budgets to 5% of GDP by 2035, while Russia's defense budget jumped by 38% in 2024 to $149 billion. The U.S. DoD's $849.8 billion fiscal 2025 budget prioritizes hypersonic weapons, drones, and cybersecurity—all areas where contractors like Lockheed Martin (F-35 production) and Raytheon (air defense systems) excel.

LMT's stock has risen steadily, reflecting its dominance in fighter jets and missile systems. However, the path ahead is not without speed bumps.

Activist Campaigns: A New Frontline of Risk

While geopolitical conflicts fuel demand, activist campaigns are targeting defense contractors with growing intensity. Protests against L3Harris (LHX) in 2023–2025 highlight the risks:

• Ethical Backlash: L3Harris produces parts for nuclear-capable Trident missiles and surveillance tools used in the Israel-Hamas conflict. In May 2025, over 100 activists marched to its Northampton offices, demanding an end to tax breaks and a weapons ban.
• Reputational Damage: Companies like Lockheed Martin face protests linking their weapons to civilian harm and environmental harm (e.g., depleted uranium munitions).

LHX's stock dipped following the May 2025 protests, though it recovered quickly. Still, sustained activism could deter talent recruitment or trigger legislative scrutiny.

Regulatory Cracks: Compliance Costs and Penalties

Beyond activism, contractors face escalating regulatory hurdles:

1. Cybersecurity Mandates:
2. The Pentagon's CMMC 2.0 certification requires contractors to prove compliance with cybersecurity standards. Firms failing audits face penalties or contract cancellations.

3. The DOJ's Civil Cyber-Fraud Initiative (CCFI) has already netted $93 million in fines in 2024 for contractors misrepresenting cybersecurity practices.

4. Foreign Investment Restrictions:

5. Executive Order 14105 bars U.S. investments in Chinese tech firms, complicating supply chains for contractors reliant on global parts.

6. The CFIUS review process now scrutinizes even small foreign investments, delaying M&A deals.

7. Environmental, Social, and Governance (ESG) Pressures:

8. Investors increasingly demand transparency on arms sales and environmental impact. Companies like Raytheon face pressure to align with the Arms Trade Treaty (ATT), which aims to curb human rights abuses.

Investment Considerations: Navigating the Minefield

Top Risks to Monitor:

• L3Harris (LHX): High activist exposure (protests, tax controversies) and reliance on nuclear missile tech make it vulnerable to reputational and regulatory hits.
• Lockheed Martin (LMT): Despite strong tailwinds, its role in controversial arms sales and environmental criticism could alienate ESG-focused investors.
• Boeing (BA): While benefiting from NATO fighter jet orders, its supply chain bottlenecks and legacy liabilities (e.g., 737 MAX lawsuits) add complexity.

Opportunities in the Sector:

• Raytheon Technologies (RTX): Its focus on air defense systems (e.g., Patriot missiles) and cybersecurity solutions aligns with NATO's 1.5% “security initiatives” budget.
• Booz Allen Hamilton (BAH): As cybersecurity spending rises, its expertise in critical infrastructure protection offers resilience to activism.

Investment Strategy:

1. Diversify Geographically: Prioritize firms with non-U.S. contracts (e.g., Airbus in Europe's “Rearm” push) to hedge against domestic activism.
2. Short-Term Plays: Use options or ETFs like SPDR S&P Defense ETF (XAR) to capture upside from geopolitical events, while avoiding overexposure to activist targets.
3. Avoid Over-Exposed Stocks: LHX's activist vulnerability and LMT's ethical risks warrant caution unless valuations reflect these headwinds.

Conclusion: Proceed with Caution, but Stay Invested

The defense sector remains a growth story, fueled by geopolitical spending. Yet investors must factor in activist campaigns and regulatory costs as countervailing forces. Companies with strong cybersecurity compliance (e.g., RTX) or diversified revenue streams (e.g., BAH) are better positioned. For now, LMT and RTX offer the best balance of upside and risk mitigation—but keep a close watch on activist headlines and CMMC compliance outcomes.

The sector's long-term trajectory is bullish, but navigating the activist and regulatory minefield requires vigilance.