Geopolitical Tensions and Sector Exposure: The Resilience of U.S. Defense Stocks in a Polarized Era

The U.S. defense sector stands at a crossroads, shaped by a confluence of geopolitical risks, political polarization, and sustained budget growth. As global tensions with China and Russia intensify, and domestic political divides deepen, defense contractors and local economies are navigating a landscape where military mobilization is both a strategic imperative and a political lightning rod. For investors, understanding the interplay between these forces—and the long-term viability of defense stocks—is critical to assessing sector exposure in an era of uncertainty.

The Bipartisan Consensus on Defense Spending

Despite stark partisan divides on issues like healthcare and immigration, defense spending has remained a rare area of bipartisan agreement. Historical data reveals a consistent pattern: Republican administrations have historically favored maintaining or increasing defense budgets, while Democratic support for cuts has grown in recent years. The 2021 National Defense Authorization Act (NDAA), passed with bipartisan backing, authorized a record $740.5 billion in defense spending, reflecting a strategic pivot toward modernization and great-power competition.

The FY 2026 budget, requested at $1.01 trillion, underscores this trend. A 13% increase from FY 2025, it allocates $25 billion to the "Golden Dome" missile defense initiative and prioritizes nuclear modernization, hypersonic weapons, and AI-driven logistics. This spending trajectory is not merely a response to external threats but also a reflection of the entrenched economic and political power of the military-industrial complex. Defense contractors, local economies, and even small businesses tied to the supply chain benefit from a system where lobbying, campaign contributions, and the "revolving door" between government and corporate roles ensure continued funding.

Defense Contractors: Profiting from Polarization

The FY 2026 budget's emphasis on production over R&D has positioned defense giants like Lockheed Martin (LMT), Raytheon Technologies (RTX), and Northrop Grumman (NOC) for sustained revenue growth. These firms dominate high-margin programs such as the F-35 Joint Strike Fighter, hypersonic missile systems, and nuclear modernization. For example, Lockheed's 2025 defense revenue of $64.7 billion was driven by its F-35 program and investments in hypersonic propulsion, while Raytheon's $40.6 billion in revenue reflects its leadership in air defense and international arms sales.

Emerging tech firms like Anduril Industries are also gaining traction, securing contracts for AI-driven systems and autonomous platforms. These companies exemplify the Pentagon's shift toward commercial technology integration, a trend that could redefine the competitive landscape. However, legacy contractors remain dominant due to their established infrastructure and long-term relationships with the government.

For investors, the key question is whether these firms can sustain growth amid potential fiscal constraints. The Congressional Budget Office (CBO) notes that the Pentagon has historically underestimated costs by 4–5%, suggesting that FY 2026–2039 budgets could balloon to $965 billion (in 2025 dollars). This creates tailwinds for contractors with exposure to procurement and operational support (O&S) spending, which now accounts for 67% of the Pentagon's budget.

Local Economies: Boons and Banes of Defense Spending

Defense spending's impact on local economies is uneven. In regions like El Paso County, home to Fort Bliss, the Department of Defense (DOD) accounted for 72% of federal contract spending in 2022. However, "local leakage"—where 70% of DOD funds flow to out-of-county prime contractors—limits the economic benefits for local businesses. While manufacturing sectors (e.g., military apparel production) retain 87% of DOD spending, administrative and professional services see minimal local retention.

Initiatives like "Supply El Paso" aim to address this by leveraging Intergovernmental Services Agreements and the DOD's Mentor-Protege Program to boost local subcontractor participation. Yet, broader research shows that defense spending generates fewer jobs per dollar than investments in infrastructure or education. In 14 of the 20 states most dependent on military manufacturing, poverty rates exceed the national average, highlighting the sector's limited capacity to drive equitable growth.

Public Policy and the Military-Industrial Complex

The expansion of the military-industrial complex has raised concerns about transparency and accountability. Between 2020 and 2024, the Pentagon awarded $2.4 trillion in contracts, with 54% going to private firms. Five major contractors—Lockheed Martin, RTX, Boeing, General Dynamics, and Northrop Grumman—received $771 billion, while tech giants like Microsoft and Amazon increasingly enter the fray.

This concentration of power has fueled a "Camo Economy," where opaque subcontractor networks obscure the flow of funds and enable waste, fraud, and abuse. In Afghanistan, 40% of $108 billion in contract spending went to just 14 firms, with a third allocated to "undisclosed" recipients. Meanwhile, defense contractors spend millions lobbying for continued funding, with 950 industry lobbyists now operating in Washington.

Investment Implications: Balancing Growth and Risk

For investors, the defense sector offers a mix of resilience and risk. The bipartisan support for NDAA authorizations and the strategic imperative to counter China and Russia suggest long-term budget growth. However, political shifts, fiscal constraints, and calls for transparency could disrupt this trajectory.

Key considerations for investors:
1. Sector Exposure: Prioritize firms with high-margin, production-focused programs (e.g., Lockheed Martin, Raytheon) and emerging tech capabilities (e.g., AI, hypersonics).
2. Diversification: Balance defense holdings with sectors less tied to geopolitical volatility, such as clean energy or healthcare.
3. Policy Watch: Monitor legislative efforts to reform defense contracting and reduce corporate influence, which could impact margins.

In conclusion, U.S. defense stocks are well-positioned to benefit from sustained spending and technological innovation. However, their long-term viability depends on navigating political polarization, fiscal realities, and the need for systemic reforms. For investors seeking stability in a volatile world, the defense sector offers both opportunity and caution—a sector where geopolitical risk and sector exposure converge in complex, unpredictable ways.