The Russian invasion of Ukraine in February of this year has fundamentally shifted many of the preconceived notions regarding modern war held by military planners. The reserves of arms, ordnance, and equipment, let alone human life, required to conduct sustained large ground combat operations far exceeds any estimates previously believed by the DoD.
U.S. stockpiles of weaponry and ordnance have quickly dwindled as the Ukrainians put them to use defending their homeland. Russian aggression, coupled with an increasingly adversarial China in the face of these new realities of war, means the defense industry is booming.
As the chart above illustrates, since February 24th, the stocks of most top defense contractors have jumped significantly. The biggest “winners” have been BAE Systems, Northrop Grumman, and Lockheed Martin. War is big business for these companies, and investors responded accordingly to the news of the Russian invasion. Compared to the S&P 500, the returns on nearly all defense stocks have been better by double digits. Even those with negative returns have outperformed the S&P 500 by at least 10%. These stocks may continue to gain value as the U.S. and NATO allies seek to continue to arm Ukraine and restock their reserves of equipment and ordnance. Even during economic downturns, countries are willing to spend a premium on defense in times of uncertainty.
Many of the defense contracts awarded in the past four months are in direct response to the war in Ukraine. Not only are the U.S. and its NATO allies refilling their depleted inventories, but they are also looking to increase total inventory size. The others come as the U.S. shifts from counterinsurgency operations to near-peer competition with China. This is by no means a complete list of recent defense contracts or a near-complete list. Hundreds of millions of dollars in contracts are awarded almost daily. This is merely a snapshot of the larger contracts that are likely to become more the norm as the U.S. and NATO shift military priorities to implement lessons learned from Ukraine.
We’ll likely see elevated defense spending for years to come as restocking and expanding inventories of equipment and ordnance will take time. Recent supply chain disruptions, inflation, and atrophied production capacity for advanced military hardware have made it difficult for defense contractors to keep up with demand. The U.S. and other Western governments may even revise industrial policy in order to increase total production capacity and secure supply chains from disruption in the event of war. The Army has already begun working with companies to do just that.
In the arsenal of medieval Venice, the world’s first weapons factory, was inscribed the phrase “Happy is that city which in time of peace thinks of war”. It seems probable that nations around the world will be heeding such advice as we return to a time of great power competition and geopolitical uncertainty.