Geopolitical Tensions and Defense Stocks: How U.S.-Turkey F-35 Disputes Reshape the Sector

The U.S.-Turkey standoff over the F-35 Joint Strike Fighter program has evolved into a high-stakes geopolitical chess match with profound implications for defense sector equities. As Ankara and Washington reengage in technical-level talks, the unresolved tensions—centered on Turkey's refusal to neutralize its Russian S-400 air defense system—highlight the fragility of international defense partnerships and the financial risks for major contractors. For investors, this conflict underscores a broader pattern: geopolitical instability often drives demand for military hardware, but it also disrupts supply chains and contractual obligations, creating a dual-edged sword for defense stocks.

The F-35 Stalemate: Strategic and Financial Fallout

Turkey's 2019 purchase of the S-400 system triggered its expulsion from the F-35 program, a decision that immediately disrupted partnerships with U.S. contractors. Turkish Aerospace Industries (TAI), a key supplier of the F-35's center fuselage, was sidelined, forcing the U.S. to scramble for alternative suppliers. According to a report by the Government Accountability Office (GAO), the U.S. identified replacements for 817 airframe and 188 engine parts by 2020, but these adjustments came at a cost—production delays, increased expenses, and strained relations with NATO alliesGAO Report on F-35 Supply Chain Adjustments^[1].

The financial toll on defense giants like Lockheed Martin and Northrop Grumman has been significant. Lockheed Martin, the prime contractor for the F-35, warned in 2024 that persistent delays—averaging 238 days per aircraft—could harm its operating resultsF-35 Delivery Delays and Financial Impact^[2]. Meanwhile, TAI's retention of sensitive Special Tooling and Test Equipment has raised concerns about industrial espionage, complicating efforts to transfer production to Germany's Rheinmetall-Northrop Grumman joint ventureTAI’s Retention of Sensitive F-35 Equipment^[3].

Historical Precedents: Defense Stocks in Times of Crisis

History suggests that defense stocks often outperform during geopolitical crises, but the U.S.-Turkey dispute introduces unique complexities. During the Gulf War (1990), 9/11 (2001), and the Russia-Ukraine war (2022), defense stocks like Raytheon, Lockheed Martin, and Northrop Grumman outperformed the S&P 500 by margins ranging from 6.5% to 12.3%Historical Defense Stock Performance During Crises^[4]. However, the F-35 crisis differs in that it directly disrupts supply chains rather than merely stimulating demand. For example, the GAO noted that the Technology Refresh 3 (TR-3) modernization package contributed to a 238-day average delay in 2024 deliveries, a stark contrast to the 61-day average in 2023GAO Report on F-35 TR-3 Delays^[5].

Turkey's pivot to alternative procurement—such as Eurofighter Typhoons and its indigenous KAAN jet—further complicates the landscape. While this diversification could reduce U.S. contractors' exposure to Turkish markets, it also signals a shift in global defense dynamics. As one analyst noted, “The F-35 program is no longer just about aircraft; it's a proxy for broader U.S.-Turkey alignment on issues like Syria and Iraq, which have long-term implications for NATO cohesionU.S.-Turkey Strategic Divergences^[6].”

Investment Implications: Balancing Risk and Opportunity

For investors, the U.S.-Turkey dispute highlights two key themes: geopolitical risk mitigation and supply chain resilience. Defense contractors with diversified international partnerships—such as Northrop Grumman's collaboration with Germany—may benefit from the reallocation of F-35 production. However, companies reliant on Turkey's industrial base, like Lockheed Martin, face heightened uncertainty.

Historical data offers a cautiously optimistic outlook. During the 2014 Crimea annexation, defense stocks rose 8.1% as investors anticipated increased military spendingCrimea’s Impact on Defense Stocks^[7]. Similarly, the Russia-Ukraine war drove a 12.3% gain in defense equities in 2022Russia-Ukraine War and Defense Equity Gains^[8]. If the U.S.-Turkey crisis escalates or drags on, defense stocks could follow this pattern. Yet, the current situation is less binary: a resolution by year-end, as U.S. Ambassador Tom Barrack has suggested, could stabilize marketsU.S. Ambassador’s Optimism on Resolution^[9].

Notably, a backtest of Northrop Grumman (NOC) and Lockheed Martin (LMT) reveals nuanced insights into their stock behavior during earnings misses. From 2022 to 2025, NOC experienced only three instances where quarterly earnings fell below expectations. In these cases, the stock typically saw a 1-week drawdown but tended to mean-revert by day 10–15, with cumulative average returns (CAR) trailing the benchmark modestly and never reaching statistical significance at the 95% levelNOC Earnings Miss Backtest Analysis^[11]. Meanwhile, LMT had no qualifying earnings misses in the same period, suggesting its financial performance has remained more stable despite operational challenges like F-35 delaysLMT Earnings Stability Context^[12]. These findings underscore the importance of distinguishing between operational risks (e.g., supply chain disruptions) and earnings volatility when evaluating defense sector equities.

Conclusion: A New Era of Geopolitical Volatility

The U.S.-Turkey F-35 dispute is emblematic of a broader trend: defense sector equities are increasingly influenced by geopolitical realignments rather than just traditional conflicts. For investors, this means navigating a landscape where supply chain disruptions and strategic alliances are as critical as military budgets. While historical precedents suggest defense stocks can thrive in such environments, the current crisis underscores the need for nuanced analysis. As Turkey's Ambassador to the U.S. recently remarked, “The F-35 is not just a plane; it's a symbol of trust. And trust, once broken, is hard to rebuildQuoted from Turkish Ambassador’s Remarks^[10].”