Geopolitical Turbulence and the Defense Sector: How Activism and Terrorism Designations Reshape Markets

The defense and security sector has emerged as one of the most resilient and dynamic corners of global markets in recent years, fueled by a perfect storm of geopolitical tensions, regulatory shifts, and activist-driven investor behavior. From the war in Ukraine to the Middle East's escalating conflicts, and from U.S. Steel's contested acquisition to the Trump administration's sweeping policy changes, the interplay between radical activism, terrorism designations, and market sentiment has become a defining force in shaping stock performance and regulatory landscapes. For investors, understanding these dynamics is no longer optional—it's essential.

The Surge in Defense Stocks: A Perfect Storm of Factors

The defense sector's meteoric rise since 2023 is no accident. NATO allies, spurred by U.S. demands for 5% GDP defense spending, have poured billions into rearmament. Germany, now the world's fourth-largest military spender, and Poland, allocating 4.2% of GDP to defense, exemplify this trend. Defense stocks like Rheinmetall (DE:RHM) and BAE Systems (LON:BA.) have surged, with the latter seeing a 35% gain in 2024 alone. Even aerospace giants like Rolls-Royce (LON:RR.) and Airbus (PA:002020) have benefited from a mix of commercial and defense contracts.

This growth is underpinned by a structural shift: defense spending in Europe now exceeds Cold War levels, with Central and Western nations increasing outlays by 16% between 2022 and 2023. The sector's momentum is further bolstered by technological innovation, from Kongsberg's (OSE:KONG) advanced radar systems to Howmet Aerospace's (NYSE:HWM) contributions to next-gen fighter jets.

Activism as a Catalyst: From U.S. Steel to Federal Contractors

Radical activism has increasingly intersected with the defense sector, often with direct implications for stock valuations. The most high-profile example is the campaign to block Nippon Steel's acquisition of U.S. Steel. Activist investors, including Carl Icahn, argued that the deal threatened national security and supply chain resilience. U.S. Steel's stock (NYSE:X) fluctuated wildly during the 10-month saga, peaking at $82 in early 2024 before settling at $68 by year-end.

The activism around U.S. Steel is emblematic of a broader trend: investors leveraging geopolitical concerns to influence corporate strategy. Similar dynamics have played out in the defense contracting sector, where activists have pushed for cost-cutting and operational efficiency in the wake of Trump's executive order on federal spending. Companies like Raytheon (NYSE:RTX) and Lockheed Martin (NYSE:LMT) have seen activist pressure to streamline operations, with both stocks rising 12–15% in 2024 as investors rewarded improved margins.

Terrorism Designations and Market Volatility

Terrorism designations also play a critical role in shaping market sentiment. The October 2023 Hamas-Israel conflict, for instance, triggered a 10% spike in U.S. defense ETFs like the iShares U.S. Aerospace & Defense ETF (NASDAQ:ITA). Investors interpreted the conflict as a catalyst for increased military spending, particularly in the Middle East, which accounts for 40% of U.S. arms exports.

The designation of Hamas as a terrorist organization, coupled with Iran's support for Hezbollah, created a “threat multiplier” effect. Google search data from the period shows a 300% surge in queries related to “defense stocks” and “arms exports,” reflecting heightened investor interest. While the short-term gains were clear, long-term risks—such as potential arms embargoes or export restrictions—remain underappreciated.

Regulatory Shifts and the Trump Factor

The Trump administration's regulatory agenda has further amplified volatility. The mass layoffs at the Department of Education, the restructuring of U.N. engagement, and the 50-day delay in imposing sanctions on Russia have all contributed to a fragmented regulatory environment. Mike Waltz's criticism of the U.N. and calls to dismantle agencies like UNRWA have added to the uncertainty, with defense stocks often reacting to these developments.

For example, shares of Northrop Grumman (NYSE:NOC), a key supplier to the U.S. military, dipped 4% in early 2025 following Waltz's public criticism of U.N. agencies, as investors fretted over potential disruptions in international defense contracts.

Investment Implications: Navigating the New Normal

For investors, the defense sector's future hinges on three key factors:
1. Geopolitical Escalation: Continued conflicts in the Middle East and Eastern Europe will sustain demand for advanced military technology.
2. Activist Pressure: Cost-cutting campaigns and strategic realignments will likely drive performance in mid-sized defense contractors.
3. Regulatory Uncertainty: Shifts in U.S. foreign policy and federal spending priorities could create both opportunities and risks.

A diversified portfolio with exposure to both traditional arms manufacturers (e.g., BAE Systems) and tech-driven defense innovators (e.g., Hensoldt AG) is advisable. Additionally, hedging against regulatory risks—through positions in companies with strong international partnerships—could mitigate volatility.

Conclusion: A Sector in Transition

The defense and security sector is at a crossroads, shaped by a confluence of activism, terrorism designations, and regulatory shifts. While the immediate outlook remains bullish, investors must remain vigilant about the sector's long-term sustainability. As the world grapples with unprecedented geopolitical challenges, the defense industry's ability to adapt—and thrive—will define its trajectory for years to come.