Defence stocks are shares in companies that make military equipment and provide security services to governments. They include the makers of aircraft, ships, missiles, armoured vehicles, electronics and cyber systems. For years they were seen as dull and steady. Since Russia’s invasion of Ukraine, and with conflict in the Middle East, they have become one of the most closely watched corners of the stock market.
Who the main players are
In the UK, the best known is BAE Systems, one of the largest defence contractors in the world. Rolls-Royce has a big defence business making engines for military aircraft and nuclear submarines, and companies such as Babcock and QinetiQ provide support and technology. In Europe, names include Rheinmetall in Germany, Thales in France and Leonardo in Italy. In the US, the giants are Lockheed Martin, RTX, Northrop Grumman and General Dynamics.
What drives their profits
The main customer is government, which makes defence different from most industries. When governments raise military budgets, these companies can win large orders. Contracts often last many years, so a company’s order book, sometimes called its backlog, gives investors unusually good visibility on future revenue. Our guide to revenue backlog explains why that matters.
European governments have been raising defence spending targets, and the UK has committed to spending a larger share of national income on defence over the coming years. Those decisions feed directly into expectations for contractors’ future sales, which is why defence shares often react to government announcements and Budgets.
Why they behave differently
Defence stocks do not always follow the wider market. When geopolitical tension rises, they can rally while other shares fall, because investors expect more orders. That gives them a reputation as a hedge against conflict. It is not guaranteed: if a peace deal looks likely, they can fall sharply as that expectation fades.
Investors also watch the factory side. Many defence companies have struggled to build equipment fast enough to meet demand, so supply chain problems, labour shortages and the cost of raw materials can all hit margins.
The risks investors overlook
The first risk is valuation. After a long rally, a lot of good news may already be in the price, and shares can fall on any hint that orders will slow. The second is political. Budgets can be cut, contracts can be cancelled or delayed and export licences can be blocked. The third is ethical. Some funds avoid defence companies entirely, which limits the pool of buyers, though that has changed somewhat in recent years.
Why they are in focus this week
The UK Budget on Wednesday 28 October is expected to say more about how extra defence spending will be funded, and tensions between the US and Iran remain high. Both can move defence shares. Our Morning Market Brief has the wider picture.
The bottom line
Defence stocks are driven by government budgets, long-term contracts and geopolitics. They can offer a different kind of exposure from the rest of the market, but they carry their own risks, and buying them simply because the news is frightening is rarely a sound plan.
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