Risk and Reward: How Geopolitical Tensions Are Shaping Defense and Energy Investments

The escalating conflict between Israel and Iran has introduced a new layer of volatility to global markets, but beneath the chaos lies a clear investment thesis: geopolitical risk is driving long-term demand for defense systems and energy security infrastructure. While short-term price swings may unsettle portfolios, the strategic calculus for investors is clear. Defense contractors like Raytheon Technologies (RTX) and energy equities tied to Middle Eastern chokepoints offer compelling opportunities—if you can stomach the turbulence.

Defense Contractors: A Resilient Play on Global Insecurity

The Israel-Iran conflict has underscored a simple truth: nations will spend whatever it takes to defend themselves. This is a tailwind for defense contractors, even as near-term earnings struggles create buying opportunities.

Raytheon: A Case Study in Resilience

Raytheon Technologies (RTX) exemplifies the tension between short-term caution and long-term growth. Despite posting a 5.2% year-over-year revenue rise to $20.31 billion in Q1 2025, RTX shares dropped 5% after its earnings report due to conservative guidance and concerns over tariff risks.

Yet the company's position in missile defense systems—like the Patriot air defense network, which is critical to countering Iranian threats—remains irreplaceable. Orders for its AIM-9X Sidewinder missiles and SPY-6 radar systems (which track hypersonic threats) are soaring. Analysts at Morgan Stanley recently upgraded RTX to Overweight, citing its $83.5 billion full-year revenue target as achievable if geopolitical tensions persist.

Why RTX is undervalued now:
- Its P/E ratio of 12.5x is below the sector average of 14x.
- The company's dividend yield of 1.8% offers downside protection.
- A $1.47 non-GAAP EPS suggests earnings stability despite near-term headwinds.

Investors should view RTX's dip as a buying opportunity. The defense sector's 12% average annual return during prior U.S.-Iran tensions (2020) is a historical precedent.

Beyond RTX: The Defense Sector's Broad Appeal

Lockheed Martin (LMT) and Northrop Grumman (NOC) also benefit from the same $800 billion global defense spending boom, though their stock performances have been mixed. LMT's Aeronautics and Missiles segments are key to U.S. partnerships with Israel, while NOC's $50 million investment in Firefly Aerospace highlights its pivot to space-based security—a critical layer in modern defense.

Energy Markets: Betting on Volatility and Supply Risks

The Strait of Hormuz, through which 20% of global oil flows, has become a geopolitical flashpoint. Iran's threats to “close the strait” have pushed WTI crude prices to $72.98 per barrel—a 7% surge since mid-May—and analysts warn of a potential $100+/barrel spike if supply routes are disrupted.

WTI Dynamics: A Bull Case for Oil Equities

The Strait of Hormuz as a chokepoint creates a textbook asymmetric risk: upside for oil prices is unlimited, while downside is capped by global demand. Investors should capitalize on this by overweighting energy equities with exposure to Middle Eastern infrastructure.

Top Energy Plays:

1. ExxonMobil (XOM): Its $15 billion investment in Saudi Arabian refining positions it to profit from rerouted Middle Eastern crude.
2. Chevron (CVX): A leader in LNG exports, which are critical to diversifying energy supply chains.
3. Energy ETFs: The Energy Select Sector SPDR Fund (XLE) offers diversified exposure to oil majors and refiners.

The oil supply calculus: Even if the Strait of Hormuz remains open, attacks on infrastructure (e.g., Israel's strikes on Iran's South Pars gas field) will keep volatility high. This benefits energy infrastructure firms like Williams Companies (WMB), which operate critical U.S. pipelines.

Navigating the Risks: A Balanced Portfolio Approach

The Israel-Iran conflict is a high-beta event, requiring caution. Here's how to allocate:

1. Defense Sector:
2. Buy RTX dips: Target $115–$120 for entry, aiming for $140+ in 12 months.

3. Diversify with LMT and NOC: Their dividend yields (1.5% and 1.9%) offer stability.

4. Energy Sector:

5. Overweight oil equities: Allocate 20–25% to XLE or individual names like XOM.

6. Hedge with inverse ETFs: Use ProShares Short S&P 500 (SH) to offset macro risks.

7. Cash and Safe Havens:

8. Keep 10–15% in gold (GLD) or U.S. Treasuries to weather sudden volatility.

Conclusion: Geopolitics as a Catalyst for Profits

The Israel-Iran conflict is a reminder that markets discount fear, not fundamentals. In defense, the demand for missile systems and cybersecurity is real and growing. In energy, supply risks will outpace short-term demand slowdowns.

Investors who buy the dips in RTX and energy equities now—while hedging against systemic risks—will be positioned to profit from a geopolitical landscape that is here to stay.