The 'Non-Peace Dividend': Why Defense Stocks Are Still a Strategic Buy Amid Peace Hopes in Ukraine

The global defense sector has long been a barometer for geopolitical tensions, but the Ukraine conflict has rewritten the rules of engagement. As peace talks between the U.S. and Ukraine spark optimism, defense stocks have not cratered. Instead, they remain resilient, defying expectations of a "peace dividend." This paradox underscores a critical shift: defense equities are no longer cyclical plays tied to short-term conflict cycles but structural investments anchored by long-term geopolitical risk pricing and sustained global militarization.

The Illusion of a Peace Dividend

Historically, peace initiatives have led to sell-offs in defense stocks as investors anticipate reduced military spending. However, the 2025 landscape is different. While European defense companies like Rheinmettal and BAE Systems dipped following recent peace talk hopes, the broader sector remains robust. This is because the Ukraine war has accelerated a global realignment of defense priorities, not just in Europe but across the Indo-Pacific and the Middle East.

Data from BlackRock's Geopolitical Risk Dashboard reveals that global defense spending is now driven by a "perpetual conflict" mindset. The U.S. National Security Strategy, for instance, has reoriented trade and industrial policies to prioritize defense, creating a "more competitive and fragmented geopolitical environment." This shift has translated into record budgets: the U.S. 2026 fiscal year defense budget exceeds $1 trillion, while the EU has pledged $600 billion in military procurement. These figures are not reactive but proactive, reflecting a strategic pivot to deterrence amid rising multipolar tensions.

Geopolitical Risk as a Pricing Mechanism

The pricing of geopolitical risk into defense stocks has evolved from a reactive to a proactive mechanism. Research indicates that investors now price in risk over multi-year horizons, recognizing that conflicts like Ukraine are not isolated events but part of a broader trend. For example, the MSCI World Aerospace and Defense Index

trades at a lofty 41.5x P/E ratio, a premium to the broader market, yet this valuation is justified by the sector's structural growth drivers.

Key among these is the sector's contract model. Defense companies operate on multi-year, fixed-price contracts with governments, ensuring cash flow stability even as geopolitical narratives shift. Firms like Lockheed Martin and Northrop Grumman have leveraged this model to report record backlogs and upgraded guidance in 2025. Lockheed's missile defense systems, for instance, are in unprecedented demand, with sales surging due to NATO's accelerated modernization efforts. Similarly, RTX Corporation's 12% year-on-year revenue growth-driven by a historic $15 billion AMRAAM missile order-highlights how geopolitical risk is embedded in long-term procurement pipelines.

Innovation as a Buffer Against Volatility

While geopolitical tensions drive demand, innovation acts as a buffer against volatility. found that technological advancements in the defense sector have a more pronounced impact on stock returns than geopolitical risk events. This is particularly true for U.S. firms, which have leveraged R&D investments to dominate emerging fields like space defense and autonomous systems.

The U.S. Space Force's $40 billion FY2026 budget exemplifies this trend. Companies with expertise in satellite communications, hypersonic weapons, and AI-driven logistics are reaping the rewards. For example, SpaceX's influence on launch costs has created a ripple effect, enabling mid-cap firms like Rocket Lab to secure niche contracts as documented in the report. Meanwhile, European firms are pivoting to interoperable systems, with U.S. exports of $118 billion in 2024 underscoring the global demand for standardized defense platforms.

Valuation Concerns and Strategic Resilience

Critics argue that defense stocks are overvalued, citing the MSCI index's 41.5x P/E ratio which is not reflective of the sector's unique characteristics. However, this metric fails to account for the sector's unique characteristics. Unlike cyclical industries, defense equities are insulated by government guarantees, inflation-linked contracts, and the inelasticity of defense demand. Even as interest rates rise, the sector's EV/EBITDA multiples remain attractive relative to its growth trajectory.

Moreover, investor sentiment is shifting toward viewing defense stocks as a hedge against macroeconomic uncertainty. During the Russia-Ukraine war, U.S. defense companies outperformed the S&P 500, acting as a "robust hedge" against geopolitical volatility. This trend is likely to persist as conflicts in the Middle East and Indo-Pacific regions force governments to prioritize defense over social spending-a "guns versus butter" dilemma that favors long-term sectoral growth.

Conclusion: A New Era of Defense Investing

The Ukraine conflict has catalyzed a paradigm shift in defense investing. Peace hopes no longer trigger sell-offs; instead, they are met with strategic buy-ins, as investors recognize that geopolitical risk is now a permanent feature of the global landscape. With budgets surging, innovation accelerating, and valuations justified by structural demand, defense stocks remain a compelling long-term play-even in a world yearning for peace.