Defense Stocks: A Strategic Buy Amid Geopolitical Uncertainty and Strong Earnings Momentum

The aerospace and defense sector is emerging as a compelling long-term investment opportunity, driven by a confluence of geopolitical tensions, robust order backlogs, and evolving margin dynamics. As governments worldwide prioritize national security amid conflicts like the Russia-Ukraine war and the Israel-Iran standoff, defense contractors are positioned to benefit from sustained demand and strategic capital allocation.

Geopolitical Uncertainty Fuels Defense Spending

Global defense budgets surged by 9% in 2024, with European nations projected to grow their allocations at an annual rate of 6.8% through 2035, outpacing the U.S., Russia, and China [3]. In the U.S., President Trump’s proposed 13% increase in the 2026 defense budget underscores the sector’s tailwinds [1]. This spending surge is not merely reactive but reflects a strategic shift toward modernization, with a focus on cyber capabilities, space systems, and next-generation military technologies.

Order Backlogs Signal Sustained Revenue Visibility

Defense contractors are sitting on record backlogs, providing long-term revenue certainty. General Dynamics (GD) reported a Q2 2025 book-to-bill ratio of 2.2-to-1 and a total backlog exceeding $103.7 billion, including a $4.3 billion T-6 aircraft support contract [5]. MDA Space’s backlog swelled to $6 billion after securing a $1.8 billion LEO constellation award, while Astronics Corporation’s $645.4 million backlog includes 75% expected to be recognized within 12 months [3][4]. These figures highlight the sector’s ability to convert government contracts into multiyear revenue streams.

Margin Trends: Challenges and Strategic Adjustments

While defense firms historically lag behind commercial peers in profitability—averaging 5% operating margins from 2019 to 2023 [3]—companies are recalibrating strategies to improve returns. Boeing, for instance, aims for a 10% operating margin by 2025–2026, despite a $3.1 billion loss in Q3 2022 due to fixed-price contract charges [1]. Meanwhile, R&D and capital expenditures have risen from 8% of revenue in 2020 to 11% in 2022, reflecting a shift toward innovation and operational resilience [3].

Government Contracts: A Double-Edged Sword

U.S. government contracts remain the lifeblood of the sector. Lockheed Martin derives 71% of its revenue from federal contracts, while Boeing’s Defense, Space & Security segment relies on 84% from the Department of Defense [1]. However, firms like Parsons Corporation are diversifying internationally, securing $475 million in contracts across Saudi Arabia and Dubai to hedge against U.S. budget volatility [2]. This dual strategy—leveraging domestic demand while expanding globally—reduces exposure to political and fiscal uncertainties.

Innovation and R&D: The New Frontier

The sector’s focus on cutting-edge technologies is accelerating. Honeywell’s $1.9 billion acquisition of Cobham Advanced Electronic Solutions and Thales SA’s AI accelerators exemplify the push toward electronic warfare and data-driven decision-making [1]. Venture funding for defense tech startups also hit $31 billion in 2024, a 33% increase from 2023 [5], signaling a broader ecosystem of innovation.

Long-Term Institutional Positioning

For institutional investors, the sector’s appeal lies in its combination of stable cash flows and growth potential. With the global defense market projected to grow from $1.98 trillion in 2024 to $2.57 trillion by 2029 [1], companies with strong backlogs and R&D pipelines are well-positioned to outperform. Firms like Lockheed Martin ($64.7 billion in 2024 defense revenue) and Northrop Grumman ($35.2 billion) [4] exemplify this model, balancing near-term profitability with long-term technological leadership.

Conclusion

Defense stocks offer a unique blend of resilience and growth in an era of geopolitical uncertainty. While margin pressures persist, the sector’s focus on innovation, diversified contract portfolios, and government-driven demand create a compelling case for long-term institutional investment. As conflicts and modernization needs persist, aerospace/defense contractors with robust backlogs and strategic R&D investments are poised to deliver sustained value.

Source:
[1] 2 Defense Stocks Poised to Surpass Q2 Earnings Estimates [https://finviz.com/news/131817/2-defense-stocks-poised-to-surpass-q2-earnings-estimates]
[2] Parsons Corporation: Cybersecurity Contracts Fuel Strategic Scalability, Rising Defense Spending [https://www.ainvest.com/news/parsons-corporation-cybersecurity-contracts-fuel-strategic-scalability-rising-defense-spending-2506/]
[3] Aerospace and defense industry performance and outlook [https://www.pwc.com/us/en/industries/industrial-products/library/aerospace-defense-review-and-forecast.html]
[4] The Top 10 U.S. Aerospace and Defense Contractors [https://www.usfunds.com/resource/the-top-10-u-s-aerospace-and-defense-contractors/]
[5] Defense Tech is at an Inflection Point – The Opportunities ... [https://p72.vc/defense-tech/defense-tech-is-at-an-inflection-point-the-opportunities-challenges-and-innovations-shaping-the-sectors-future/]