Geopolitical Crosswinds: Navigating Volatility for Gains in Energy and Defense

The U.S. stock market in 2025 has become a proxy for global geopolitical turbulence, with energy and defense sectors emerging as both casualties and beneficiaries of escalating tensions. While the S&P 500 dropped 21.4% intraday from February to April—a stark correction—the interplay of Fed policy uncertainty and Middle East instability has created a volatile landscape where opportunity lurks in the chaos.

For investors, this is a moment to dissect the risks and rewards of two sectors uniquely positioned to capitalize on these crosswinds: energy and defense.

Energy: Geopolitical Risks Fueling Valuation Opportunities

The energy sector is in the crosshairs of Middle East conflicts, with Israel-Iran hostilities and regional instability threatening oil supply chains. The result? Elevated crude prices that have become a lifeline for producers like Chevron (CVX) and EOG Resources (EOG).

These companies are benefiting from a dual tailwind: rising oil prices driven by supply risks and the Fed's cautious rate policy. While the central bank has held rates steady at 4.25%-4.50%, signaling a reluctance to ease prematurely, energy stocks have shown resilience. Historically, periods of high geopolitical uncertainty—like the current U.S. Economic Policy Uncertainty Index spiking to 483 in March—have preceded equity rebounds once policy clarity emerges.

Investors should consider energy as a cyclical play, but with a caveat: volatility is here to stay. Short-term traders might pair long positions in energy ETFs like XLE with put options to hedge against intraday swings. For the long term, companies with exposure to shale plays and refining capacity, such as EOG, offer durable upside as geopolitical premiums to crude prices persist.

Defense: A Boom Built on Contracts and Innovation

The defense sector is less a victim of geopolitical tension than a direct beneficiary. U.S. military modernization priorities—AI-driven systems, hypersonic capabilities, and solid rocket motor (SRM) production—are fueling a spending surge.

At the forefront is Palantir Technologies (PLTR), which has secured contracts totaling over $900 million for platforms like the Space C2 Data System and Army Vantage. These systems aggregate data from satellites, drones, and ground sensors, giving the Pentagon real-time decision-making tools in contested environments.

Beyond Palantir, the SRM sector is a hidden gem. New entrants like Anduril Rocket Motor Systems (a division of Anduril Industries) are displacing legacy players with advanced materials like its ALITEC aluminum-lithium alloy, which boosts missile range while reducing weight. Anduril's $14.3 million Pentagon contract to modernize its Mississippi facility positions it to produce 6,000 SRMs annually by 2026—a critical fill for the U.S. military's inventory.

The sector's growth is further underpinned by the DoD's $849.8 billion fiscal 2025 budget, with $163.4 million allocated to hypersonic research and $61.2 billion for airpower. Defense contractors like Raytheon (RTX) and Northrop Grumman (NOC) are dual-sourcing SRM production to mitigate supply chain risks, creating a “winner-take-more” dynamic for firms with scale and innovation.

Advanced Air Mobility: The Next Frontier in Defense and Transport

While defense contractors dominate headlines, the Advanced Air Mobility (AAM) sector is quietly positioning itself as a long-term growth engine. The FAA's draft guidelines for vertiport design and the FCC's proposed spectrum rules for UAS (unmanned aircraft systems) have cleared regulatory hurdles for eVTOL (electric vertical takeoff and landing) aircraft.

Companies in this space, such as Joby Aviation and Archer Aviation, are targeting 2025 launches for urban air taxis, while military applications like the MQ-4 Triton drone (funded by the DoD) highlight dual-use potential. The global AAM market, projected to hit $74.93 billion by 2034, is a bet on decarbonization and urban congestion solutions—a secular trend unshaken by short-term volatility.

Investment Strategy: Balance Risk and Reward

The current environment demands a dual-pronged approach:

1. Short-Term Hedging: Use inverse ETFs like SRSX or put options on energy ETFs to offset intraday swings. The Russell 2000's near-bear-market decline underscores the need for caution.
2. Long-Term Conviction: Allocate to defense leaders with contract visibility (PLTR, RTX) and energy firms with shale leverage (EOG, CVX). Monitor the Fed's next moves—if rates drop from 4.50%, equities could rally sharply.
3. Watch the Supply Chain: Defense and energy companies with digital supply chain tools (e.g., blockchain for counterfeit parts tracking) will outperform peers as geopolitical risks strain logistics.

Conclusion: Volatility as an Investor's Friend

Geopolitical uncertainty isn't a bug—it's a feature of 2025 markets. Energy and defense sectors, though volatile, offer asymmetric upside: geopolitical premiums could linger for years, while technological innovation in defense and AAM creates lasting value.

Investors who pair tactical hedging with a long-term focus on companies like Palantir, Anduril, and EOG Resources stand to profit. As history shows, periods of maximum uncertainty—like the current 483 U.S. Economic Policy Uncertainty Index—often precede the strongest rebounds.

The question isn't whether to engage—it's how to do so without losing sleep.